Briefly describe the scope of government activities in public finance

1. Provision of pure public goods. These are goods to which the principle of exclusion does not apply because they are indivisible and their benefit cannot be priced. The suppliers are faced with the free riders problem since the users cannot be forced to reveal their demand preferences. The government must provide for such.
2. Correction of externalities – suppose a particular public good has external economies which can not be measured and therefore can not be priced. The spills over gains are there in the society, but the supplier cannot charge for it. Hence the price much is lower than the social margin of benefit that determines his supply on the basis of the price he gets. Hence he produces less than what could be the optimum quantity from the society‘s point of view. The government must provide for such.
3. Quasi – public goods/mixed goods/impure public goods. They posses both element of
public and private e.g. education, polio vaccination.
4. Merit goods – They are goods whose provision the society wishes to encourage. Provision of such goods helps the economy to attain a high level of efficiency and contribute to achieving basic objectives of the society. E.g. health, education. They have an overriding importance e.g. precious lives may be lost, if health services are left to the forces of the market only. The state must supplement their availability.
5. Demerit goods: these are goods that are viewed as being socially harmful e.g. cigarette, addictive drugs. For such goods government takes measure to discourage consumption especially through levy of taxes or legislation to discourage consumption.
6. Market failure. Market tends to operate inefficiently on account of the existence of public goods, monopolies and in the absent of law of constant returns. The condition necessary to achieve the market efficient solution fail to exist. The government must intervene.

---

NatalieR answered the question on June 21, 2022 at 05:14