Unit 3.1 - Reasons for government intervention

• Reasons for Government intervention

  • Lack of public goods
  • Underproduction of merit goods
  • Overconsumption of demerit goods
  • Information failure
  • When the free market does not make best use of scarce resources
• Public goods


  • Non-excludable
  • Non-rival
• Addressing the non-provision of public goods

  1. The market may not produce public goods as it is not profitable to do so

  2. Government needs to provide these goods and services

  3. This creates an opportunity cost
• Addressing the overconsumption of demerit goods

  1. Goods considered as undesirable

  2. Tends to be over provided and therefore over consumed (due to lack of information)

  3. Regulations banning smoking in public places

  4. Regulations on packaging - warning and graphic images
• Addressing the underconsumption of merit goods


  1. Goods that are more beneficial to consumers than they realise (information failure)

  2. When provided by the private sector it is often undersupplied

  3. Nationalisation - not always practical. Therefore rather provide the goods and services that are under supplied
• Maximum prices


  Price ceiling - Cannot sell it at any price above the price ceiling
• Minimum prices


  Price floor - Cannot sell it at any price below the price floor