This requires a balanced response in which both the advantages and disadvantages of government interventions must be discussed. One sided answer will lead to maximum half the marks.
Advantages of government intervention:
- indirect taxes to discourage consumption of demerit goods
- subsidies to encourage consumption of merit goods
- taxation to finance expenditure on public goods
- regulations to control private producers, e.g. on pollution and monopolies having market dominance.
Limitations of government intervention:
- consumption of demerit goods might be discouraged, but unlikely to end completely given inelastic demand, e.g. for cigarettes and alcohol
- consumption of merit goods might be encouraged, but still a limit to extent of increase in consumption
- available finance to provide public goods might be limited/restricted, especially if a large budget deficit
- regulations may not be adequately policed/enforced.