INTERVENTION USING THE PRICE MECHANISM
Governments use a variety of ways to influence prices, which then would affect the demand for a product.
Indirect taxation to reduce the consumption of negative externalities: some products have indirect taxes placed on them, with the aim of reducing their consumption. Examples include cigarettes, petrol and congestion charging. The tax is set to be equal to the value of the negative externality, with the aim of internalising the externality, ie by giving the externality a price, it can then allow the market to influence how much of the negative externality is generated. Indirect taxation raises costs, resulting in a fall in demand with fewer negative externalities generated.
Congestion charging: Road users are charged to use road space. Access to peak time travel can be set at a higher congestion charge to encourage road users to reduce travelling at these times.
Subsidies to encourage the consumption of positive externalites: some products like education and health offer significant positive externalities when consumed. The government will subsidise consumption by offering these products free at the point of use.
Pollution permits: governments can provide permits or allowances which allow companies to produce negative externalities, eg air pollution. Companies can then trade the pollution permits, eg efficient companies can sell any spare allowances to companies who are exceeding their pollution allowances.
Buffer stocks: a scheme to stabilise prices by buying up excess supply when the market is over produced and placing into storage. When shortages occur, some of the buffer stock is released onto the market to prevent prices going too high