ChainWhat it assumes · how to break it
Start
Many consumers underestimate the long-term harm of regularly drinking sugary drinks, such as tooth decay, obesity and type 2 diabetes.
1
As a result, consumers believe the benefit of sugary drinks is higher than it really is, so their perceived marginal private benefit is above the true benefit.
imperfect information · demerit good
imperfect information · demerit good
Best link to attack
Assumes: Consumers lack information about the long-term harm.
Assumes: Consumers lack information about the long-term harm.
But: Health campaigns and labelling mean many consumers know the risks; if they still choose sugary drinks, their consumption reflects their preferences.
2
Since consumers decide how much to buy by comparing their perceived benefit with the price, they buy more than they would if they were fully informed.
consumer decision-making · rational choice
consumer decision-making · rational choice
Assumes: Consumers act on the information they have.
But: Many consumers act on habit or impulse, so better information may change their choices only a little.
3
Therefore, consumption settles at Q1 where perceived MPB = MPC, above the optimum Q* where the true MPB = MPC, so too many resources are allocated to sugary drinks.
overconsumption · misallocation of resources
overconsumption · misallocation of resources
Assumes: The information gap is large enough to change behaviour.
But: If the gap is small, perceived and true benefit are close, and consumption is only slightly above Q*.
End
Sugary drinks are overconsumed: consumption at Q1 is above the level consumers would choose with full information, so too many resources are allocated to them.
Evaluation chain
- E1However, the overconsumption depends on consumers really lacking information about the harm.
- E2If labelling and health campaigns have already made the risks widely known, consumers who keep buying are choosing with the facts in front of them.
- E3As a result, their perceived benefit is close to their true benefit, and consumption may be near the informed level.
- E4So the overallocation caused by the information gap may be small, and remaining high consumption may come from habit or present bias, which information alone does not fix.
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Questions this answers
- Explain how imperfect information can lead to the overconsumption of a good.
- Using a diagram, analyse why demerit goods are overconsumed.
- Assess whether information gaps are the main reason for high consumption of sugary drinks.
Diagram
Perceived MPB above true MPB (= MSB), with MPC = MSC (supply): market output Q1 where perceived MPB = MPC, social optimum Q* where true MPB = MPC, so Q1 > Q*. Mark the overconsumption as the distance Q*Q1.
Reverse and related
Consumers underestimate the benefit of a merit good, e.g. a health check → perceived MPB below true MPB, so it is underconsumed.