Chapter 11/12

Question 1

Define economy

Answer 1

A system that attempts to solve the basic economic problem.

Question 2

What is the difference between the private and public sector?

Answer 2

Provision of goods and services in the economy controlled by individuals/government.

Question 3

What are the aims of the private sector?

Answer 3

Survival, to generate profit, social responsibility and growth.

Question 4

What are the aims of the public sector?

Answer 4

Improve quality, minimise costs, profits

Question 5

What are the different types of economy?

Answer 5

• Market/free economy (capitalist)
• Command/ planned (communist)
• Mixed economy

Question 6

What is a mixed economy?

Answer 6

Economy where goods and services are provided by both public and private sector.

Question 7

What does the mixed economy decide?

Answer 7

• What to produce
• For whom to produce
• How to produce

Question 8

What types of good are best produced by the public sector and why?

Answer 8

Merit goods, goods which are underprovided by the private sector.
If these goods were produced only by the private sector, they would be provided inefficiently.

Question 9

For whom does the public sector produce goods for?

Answer 9

Everyone

Question 10

For whom does the private sector produce for?

Answer 10

Anyone that can afford it

Question 11

What is market failure?

Answer 11

Economy where goods/services are provided inefficiently.

Question 12

What causes market failure?

Answer 12

Negative externalities
Monopolies
Missing markets
Lack of information
Factor immobility

Question 13

How can governments intervene to avoid market failure?

Answer 13

• Businesses which impose neg externalities may be fined/regulated
• Uses laws to prevent monopolies from exploiting
• The internet has allowed for info to spread quickly.
• Can retrain workers, but can’t do much about machinery.

Question 14

What’s a public good?
What’s a merit good?

Answer 14

• Goods not likely to be provided by the private sector
• Goods under-provided by the private sector.

Question 15

What are the characteristics of public goods?

Answer 15

Non-excludability: Cannot stop someone from consuming it/individual cannot deny consumption.
Non-rivalry: The consumption of one person of a good will not reduce another.

Question 16

Explain the free rider problem.

Answer 16

If only the private sector ran the provision of public goods, it would be difficult to charge them.
Free rider- Someone who enjoys the benefit of a good but allows other to pay for it.

Question 17

Define privatization.

Answer 17

The act of selling a company owned by the government to a private investor.

Question 18

Give 3 reasons for privatisation.

Answer 18

• To generate income.
• Public sector organizations were inefficient
• To reduce political interference.

Question 19

Why does the private sector usually produce at a higher quality than the public sector?

Answer 19

Held at a higher standard/accountable + has the incentive to generate more money.

Question 20

Who is affected by privatisation?

Answer 20

Consumers
Workers
Business
Government

Question 21

How does privatisation affect consumers?

Answer 21

Hoped to increase quality bc owners will want to make profit.
Taxpayer may feel pressure though if gov pays subsidies.

Question 22

How does privatisation affect workers?

Answer 22

Workers may be redundant (fired) to reduce costs, remaining workers will feel this pressure.

Question 23

How does privatisation affect the government?

Answer 23

Earn a huge amount of revenue quickly. But people criticize the cost of sale + amount spent on advertising.

Question 24

How does privatisation affect the business?

Answer 24

More money invested, business may diversify into new areas.