How does government intervention address issues of public goods and externalities?

Government intervention addresses issues of public goods and externalities by regulating, providing, or subsidising these goods and services.

Public goods, such as street lighting or national defence, are non-excludable and non-rivalrous, meaning that one person's use does not diminish another's and no one can be prevented from using them. However, these characteristics often lead to market failure, as private firms may not find it profitable to provide these goods due to the free-rider problem. This is where government intervention comes in. Governments can provide these goods directly, ensuring that all citizens have access to them. For instance, the government funds the military and police force through taxes, ensuring national security and public safety.

Externalities are the indirect costs or benefits to third parties not involved in a transaction. They can be either positive, such as the benefits of education to society, or negative, like pollution from a factory. When externalities are present, the market often fails to allocate resources efficiently, leading to overproduction or underproduction. Government intervention can correct these market failures through various means.

For negative externalities, the government can impose taxes or regulations to discourage harmful activities. For example, a carbon tax can be levied on companies that emit large amounts of greenhouse gases, encouraging them to reduce their emissions and switch to cleaner technologies. This aligns the private costs with the social costs, leading to a more efficient outcome.

For positive externalities, the government can provide subsidies or public provision to encourage beneficial activities. For instance, the government can subsidise education or healthcare, recognising their wider benefits to society. This helps to align the private benefits with the social benefits, leading to a more socially optimal level of production.

In conclusion, government intervention plays a crucial role in addressing the issues of public goods and externalities. By providing public goods directly and regulating or subsidising activities with externalities, the government can correct market failures and ensure a more efficient and equitable allocation of resources. However, it's important to note that government intervention also has its limitations and potential drawbacks, such as the risk of government failure, and should therefore be applied judiciously.