The gov.

may leave provision to the

private sector but force consumers Various forms of gov. regulation to
to buy it if a merit good and prevent correct market failure.
them from buying it, if a demerit
good.

ADVANTAGES:

 Simple to understand e.g. legal

restrictions on age limits for the sale
of tobacco and alcohol
 It's possible to fine or close down In some cases direct controls are applied
companies which have abused the
regulations e.g. emitting dangerous
Government e.g. the Environmental Protection Act
(1989) set environmental standards for


levels of toxic waste
Consumer protection laws offer some
Regulation emissions from over 3,000 factories
involved in chemical processes, waste
redress against firms that sell shoddy incineration and oil refining. Monitored by
or unsafe goods, or which make false government pollution inspectors who have
claims about their products. It may the power to impose fines and close down
help to reduce the problem of factories.
asymmetric information.

DISADVANTAGES:

 Expensive to monitor the behaviour of firms.

 Extra costs may be incurred on firms e.g. the cost of installing pollution monitoring equipment.
 May be difficult to quantify and attach a monetary value to pollution emissions.
 Regulations prevent the operation of the price mechanism, over-ruling it completely rather than working with it.
 Gov. failure may occur if the regulations serve to misallocate resources