Government's Limited Role with Demerit Goods

Steps:

• Recall mixed economy combines market forces with government intervention to address market failures.
• Identify key government roles: providing merit and public goods, plus macroeconomic stabilization.
• Define demerit goods as harmful items (e.g., tobacco) overconsumed by the market due to negative externalities.
• Determine non-role: government discourages demerit goods via taxes or bans, not provision.

Why A is correct:

• Demerit goods cause negative externalities and are overprovided by markets; governments regulate or tax them to reduce consumption, per economic policy on externalities.

Why the others are wrong:

• B: Merit goods (e.g., healthcare) are underprovided due to imperfect information; governments provide or subsidize them.
• C: Public goods (e.g., national defense) are non-excludable and suffer free-rider issues; governments must provide them.
• D: Governments stabilize the economy through fiscal and monetary policies to manage inflation and unemployment.

Final answer: A