The products also pose harmful externalities and exude negative externalities. It means that the third parties incur the costs or the effects of consuming them. The reasons for consuming demerits goods include…
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Consumption of alcohol by teenagers also makes their parents incur huge medical expenses when the teenagers get sick. Demerit goods can be over consumed in a free market (Kohls 2003, p. 54). It is important to note that a factor that may lead to individual overconsumption is the lower cost of production because the costs are shared with third parties. People also consume more goods compared to what the society produces due lack of regulations that may restrict them.
Overconsumption can be reduced with government interventions. For instance, the government can intervene using the market-based approaches such as taxes and subsidies (Owen 2004, p. 128). It can also intervene through command and control strategies such as regulations. Awareness programs and persuasion can also be used to reduce overconsumption and overproduction.
The government may impose taxes on demerit goods in order to internalize the externalities caused by the goods. It may impose the taxes indirectly on the organizations. For example, a firm that releases pollutants in a river may be taxed. The tax imposed on such firms should be equal to the external costs incurred by third parties. The external costs incurred by the third party may include medical bills resulting from taking the polluted water from the river. This means that the harms caused by the pollutants produced by the firm are the externalities (Kazi 2008, p. 410). In order to tax such firms effectively, the government should ensure that the taxes imposed on the firms are equal to the harm. The process will discourage them from producing the pollutants because the cost of production for the company will increase (Grant & Vidler 2003, p. 76). In addition, firms will be hindered from producing large quantities of goods that harm the health of individuals. This will in turn help in reducing the quantity of demerit goods produced by the taxed
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