There are some grounds for the government involvement within a market. In a free market, the government has the duty to provide goods and services that have a low-profit margin but a very high social margin. These public goods and services include social infrastructures like highways and bridges, roads, and hydroelectric projects. The government should be concerned with availing such goods because these services are a vital part of the growth of the economy, and private investments do not typically invest in such ventures because they are not profit generating ("Econmentor.com - Role of government in a market economy," n.d.).
There are pros and cons in the provision of public goods. The main advantage is that once the government provides these goods, they are free for the use of everyone. Public goods are characterized by non-excludability- their use is not excluded from anyone, and non-rivalry consumption- one’s person consumption cannot limit the consumption of another person. The main disadvantage of public goods is the free rider problem, which is when people decide not to pay for these goods because someone else is paying for them, but still, get to use these goods since they are non-excludable.
The government is also responsible for stabilizing the economy by increasing the demand and supply of goods and services that create benefits externally. Government intervention in the economy is crucial because it regulates monopolies and promotes healthy competition in the economy. The government can also command and control regulation in the market by imposing certain standards, process requirements, or even bans ("Role of Government in a Market Economy," 2013). By doing so, the government protects environment and the interest of other companies.
The government controls merit goods and demerit goods. Demerit goods are those goods that the society deems undesirable because they impose considerable negative externalities, and these goods are likely to be overproduced and overconsumed within the market. Demerit goods include cigarettes, alcohol, and many other addictive drugs such as methamphetamine, heroine, and cocaine. The government controls the consumption of demerit goods through persuasion achieved by negative advertising campaigns, and by contracting demand by imposing high taxes on the demerit goods ("Demerit Goods and Merit Goods," n.d.). Merit goods are those goods that generate considerably positive externalities and are beneficial to the society. Merit goods and services include the provision of health and education services.
References
Demerit Goods and Merit Goods. (n.d.). Retrieved from http://www.dineshbakshi.com/as-a-level-economics/government-intervention-in-price-systems/172-revision-notes/1840-demerit-goods-and-merit-goods
Econmentor.com - Role of government in a market economy. (n.d.). Retrieved June 25, 2016, from http://www.econmentor.com/hs-advanced/microeconomics/role-of-the-government/role-of-government-in-a-market-economy/text/1059.html
Government responses - demerit goods. (n.d.). Retrieved June 25, 2016, from http://web.sis.edu.hk/Departments/EcoBus/microeconomics_11/page_163.htm
The Role of Government in a Market Economy. (2013). doi:2012books.lardbucket.org/books/microeconomics-principles-v1.0/s18-01-the-role-of-government-in-a-ma.html
