Generally, there are FOUR methods to deal with market failure.
- some of the tax revenue is used to finance merit goods and public goods, such as education and health.
- indirect tax is used to discourage production of demerit goods and others services that produce negative externalities. (However, most form of indirect tax tend to be passed on, in full or in part, to consumers.)
- Polluter pays principle. green tax. where the polluter pays explicitly for the pollution caused. (it is hard to measure the exact amount of tax , as it is hard to estimate the cost of negative externality; again, the tax can be shared with consumers; the price elasticity of demand for many demerit good is inelastic; better quality information might be used to further reduce consumption.)
It is used to encourage production and consumption which is particularly relevant in the case of merit goods and products that generate positive externalities. Examples : rural bus subsidies, winter fuel payment for aged 60 and above. education and so on.
Regulation, standards and legal controls
eg, the use of demerit goods : restrictions on the sales of tobacco products and alcohol.
- It plays an important role in reducing many forms of environmental pollution that would otherwise have been unavoidable.
It is achieving a desired environmental outcome consistent with the country`s maximum level of permitted emissions