At the point when the market forces fail to allocate assets effectively, the government may attempt to address the market failure. There are a few ways by which government can intervene in the market.
Government straightforwardly gives a decent or administration, financed through duty income, so as to give products which have positive externalities or are public goods.
Public goods can be delivered by the government to support all residents. Government can force and gather assessments to pay for the merchandise with the goal that no free riders or obligation slackers can support their conduct. The administration can force costs for negative externalities through duties or charges on individual makers and shoppers and encourage positive externalities through tax reductions or endowments for the market specialists. Increase decency of access to services, for example, human services and training, which have numerous positive externalities joined.
Subsidy is a form of government intervention, it usually involves a payment by the government to suppliers that reduce their costs of production and encourages them to increase output of a good or service.
Increases the level of supply goods and along these lines reduces cost of goods, this encourages mass production of goods due to low cost of production and also increases consumption of goods with positive externalities. Encourage consumption of merit goods and services which are said to generate positive externalities (increased social benefits). Examples might include subsidies for investment in environmental goods and services.
Taxation is a solution to correct market failure which is arising from negative externalities. A higher taxation will reduce the supply of goods (demerit goods) or discourage production of demerit goods which has negative externalities.
Introducing an indirect tax (tax levied on goods and services) will increase prices to reduce consumption of a good that has negative externalities.