Define what a Demerit Good is and explain why they are often over-consumed in the free market.

Demerit goods are goods that cause negative externalities, which are external costs imposed upon a third party that was not involved in the economic transaction. Consumers may be unaware of the long term problems and negative externalities that demerit goods create. This is known as the consumers having imperfect information. For example consumers may be unaware of the long term health implications of consuming sugary drinks, such as obesity and diabetes. The negative externalities to third parties of a person consuming sugary drinks include the increased cost to the NHS of providing healthcare to people with obesity or diabetes. Therefore demerit goods are often over consumed in the free market, as consumers do not take into account the negative externalities.Consumers will consume products where their marginal private benefit = their marginal private cost, rather than the socially optimum output where marginal social costs = marginal social benefits. The marginal social benefits of consuming a good = marginal private benefits + negative externalities (you also could use marginal external benefits).  As consumers do not take into account the negative externalities of consumption, the marginal private benefits of consuming a demerit good are greater than the marginal social benefits. Therefore the good is overconsumed. This is a market failure and causes a deadweight welfare loss as the socially optimum output has not been consumed.