Causes of market failure: 

• merit goods under-consumed (don’t need to use that term)
• demerit goods over-consumed (don’t need to use that term) 
• public goods not provided (don’t need to use that term) 
• information failure 
• existence of externalities
• some people have more influence in a market than others
• existence of monopolies.

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.