Can someone clearly explain to me what merit and demerit goods are?

[npm]

There is overlap between externalities and merit/demerit goods, but they are not quite the same.

"merit good can be defined as a good which would be under-consumed (and under-produced) in the free market economy" (http://en.wikipedia.org/wiki/Merit_good) Thus, goods with positive externalities are generally merit goods, and those with negative externalities are generally demerit goods.

BUT, there are other types of merit goods. Take exercise equipment: it doesn't have much of an externality, but on average people would be happier if they exercised more. They don't because they are myopic.