In some cases the government can make everyone better off by raising taxes to pay for certain goods that the market fails to provide.
The correct answer and explanation is :
The correct answer is that in some cases, the government can improve overall welfare by raising taxes to fund goods or services that the market fails to provide, particularly in the case of public goods and market failures.
Explanation:
In a market economy, the provision of certain goods and services can be inefficient or insufficient, leading to what economists call a “market failure.” This occurs when the private sector fails to allocate resources efficiently or equitably. Public goods are one of the primary examples of market failures. Public goods are non-rivalrous (one person’s consumption does not reduce another’s) and non-excludable (people cannot be excluded from using the good). Examples of public goods include clean air, national defense, and street lighting. Because no individual can be excluded from enjoying these benefits, people may not be willing to pay for them, leading to under-provision of these goods in a free market. This phenomenon is known as the “free rider” problem.
In such cases, the government can step in to correct this market failure. By raising taxes, the government can generate revenue to provide these goods and services, ensuring that everyone benefits, even those who might otherwise not contribute directly to their funding. This is a form of social welfare maximization, where the government uses taxes to finance goods that increase overall societal well-being but would not be adequately provided by the private sector alone.
In addition, government intervention is sometimes needed to address externalities—costs or benefits that affect third parties who are not directly involved in a transaction. For instance, pollution generated by businesses imposes costs on society. Governments can use tax revenues to subsidize clean energy initiatives or fund regulations that curb pollution, thereby improving public welfare.
Therefore, in the presence of market failures such as public goods and externalities, raising taxes to fund government provision of goods and services can indeed make everyone better off by ensuring that critical goods are provided efficiently and equitably.