There are a variety of policies which authorities could use to intervene when the market fails (that is, when the market price does not reflect the 'true' cost or benefit of a good or service, and where the price mechanism cannot therefore work.) Different policies are suited to different failures. Below, I have set out the types of intervention, and then suggested which situations they fit. Type of Government Intervention Market Failures which the intervention is directed at Examples Indirect Taxation Indirect taxes function well to raise the price and lower the supply of a demerit good. They punish producers and discourage demand where demand is inelastic, and make the consumers pay for externalities when the consumer is inelastic. They are therefore widely used to cope with negative production and consumption externalities, though they may be subject to various forms of government failure. ...