• In a attempt to solve market failure, the government imposes rules and regulations to stop market failure

• For example, imposing laws on the minimum age that people must be before they are legally allowed to purchase cigarettes or alcohol may reduce the consumption of such demerit goods.

• Laws can also restrict where people can smoke. In many countries, smoking is banned in public places such as shopping centres, bars, restaurants, airports, railways stations and even at the beach.

The advantages of imposing rules and regulations to correct market failures

• Consumption of the good or service may be reduced.

• Awareness of the negative impacts of demerit goods (such as drinking and driving) can help to change the behaviour of people in the long term.

• Awareness of the positive impacts of consuming merit goods (such as education) is raised.

The disadvantages of imposing rules and regulations to correct market failures

• Restrictions cause underground (illegal) markets to provide the good or service, often at a very high price.

• The government has no control over the quality of the goods produced in underground markets, which in some cases can be dangerous for consumption — for example, illegally distilled vodka or tainted baby milk powder.

• People break the rules — for example, under-age smokers and alcohol drinkers can bypass the law by obtaining false ID cards.

• The fine or punishment for ignoring the rules and regulations must be enforced and set sufficiently high to discourage consumption of the good or service.