Chapter 15- Mixed Economic System Flashcards
Mixed Economic System
It is an economy in which both the private and public sectors play an important role
Aims of a Mixed Economic System
Tries to have the advantages of planned and market economic system without their disadvantages
In MES firms are privately owned and government owned
Prices are determined by market forces and some are set by government
Therefore both consumers and government determine what is produced
Products made in the private sector may increase choice and increase efficiency and create incentives
Advantages of Government intervention may Include:
Encourage consumption of merit goods
Discourage consumption of Demerit goods
Finance products such as defense
Regulate product prices to prevent exploitation of consumers by private firms
Optimum use of resources
Better long term planning
Implement progressive tax(charging the rich more tax than the poor)
Maximum and Minimum Prices
Government may impose price controls and limit a firms ability to set their own prices
They may set a maximum price in order to allow the poor to be able to afford certain products. They must set it below the equilibrium to make an impact. The issue in this is that there will be an extension in demand due to the fall in price and hence a shortage of supply.
To prevent the development of illegal markets product allocation might have to be done through rationing or lottery
To encourage production of a product, government may set a minimum price which represents the lowest price producers can charge. This must be set above the equilibrium price to make an impact but may result in a surplus due to a contraction in demand. To prevent the price being lowered by market forces, the surplus will have to be bought by the government or some other official body.
Minimum price of labor is also called minimum wage
Rationing
a limit on the amount that can be consumed
Lottery
The drawing of tickets to decide who will get the products
Subsidies and Indirect Taxes
Governments tax firms’ profits which impact the amount and the willingness of a firm to invest. Indirect taxes raise the cost of production for firms and income tax lowers the disposable income of consumers hence lowering the demand for the firms’ products.
Subsidies given to firms effect it depending on the size of the subsidy and the price elasticity of demand. The larger the subsidy the more the increase in supply
on diagrams, the size of the subsidy is determined by the distance between the 2 supply curves. If demand is inelastic subsidies would have more impact on the price of product. If demand is elastic, subsidies will have more impact on the amount sold and less impact on the price. When granting subsidies, government has to consider the opportunity cost of their decision
For tax, higher the tax higher the impact. Tax on a product with inelastic demand would have greater effect on the price than the quantity sold. In the case of a product with elastic demand, this is the other way around.
if government wans to raise revenue it should tax products with inelastic demand(quantity sold wont fall by much)
if government wants to discourage consumption of a product it will work better if demand is elastic
Competition Policy
Seeks to promote competitive pressures and prevent firms from abusing their market power. This may include:
the prevention of mergers that government thinks wont be in the best interest of consumers
removal of entry and exit into markets
regulation of monopolies
prohibition of uncompetitive practices(predatory and limit pricing)
Predatory pricing is when firms price products below cost to drive competitors out of the market
Limit pricing is when firms set prices low enough to discourage the entry of new firms in the market
Environmental policies
Government may place restrictions on the amount of pollutants that firms can emit into the air, sea and rivers and fine them if the limits are exceeded
Tradable permits are another measure introduced by governments. Each permit allows firm to pollute to a certain limit. Firm that pollute more will have to buy more permits, while the cleanest firms can sell most of their permits and increase their costs.
Regulation
This includes rules and laws that place restrictions on the activities of firms.
As a measure to prevent market failure, they have the advantage of being backed up by the law and being easily understood
They only work if most of the people agree with the regulation.(it would be difficult to enforce a regulation that the majority of people dont follow)
They may not always be successful as they dont compensate those who suffer due to market failure and they may be too restrictive at times(reducing market flexibility and creating barriers to entry)
Nationalisation
the movement of the ownership and control of an industry from the private sector to the government
Public Corporation
it is a business organization owned by the government which is designed to act in the public interest
Nationalization and Privatization
To benefit the public and improve economic performance, a government may set up or nationalize a private sector industry. These industries are known as state owned enterprises, public corporations and nationalized industries. Their funds are from the government, government approved loans and the private sector. Their prime aim is to work in public interest.
Advantages:
decisions based on full costs and benefits involved
They can be used to influence economic activity
They wont abuse market power
Ownership of an industry makes planning and coordination easier
Helps in ensuring basic industries survive(electricity, transport, etc)
Disadvantages:
They can be difficult to manage and control due to their large size
They may become inefficient, produce low quality products and charge high prices(no competition)
They will need to be subsidized if they are loss making
Some people argue that private sector firms are likely to produce high quality products at low cost and prices due to market forces and also provide greater choice. Under-investment in the private sector is also less likely as profits of public corporations might be allocated elsewhere by the government.
Others argue that there is no grantee that private sector firms will face the full market forces(monopolies). They also might not take into account total costs and benefits to society(environmental damage)
Direct Provision
Most governments produce some goods and services that they think are essential and provide them free or at subsidized prices(housing education and healthcare).
Governments want to boost the consumption of merit goods. To do this they might produce them or pay private sector firms to produce them, provide information about them benefits, or even make them compulsory to consume.
Some products such as street lights have many free riders and hence private sector firms have no incentive to produce them. They still need to be produced so they are either produced by the government or a private sector firm that has been paid by the government
Unfairness
Income distribution can become very uneven if it is solely left to market forces. Private sector will only produce products that people want and can afford, this means that there wont be any products for the poor. in this case a government would try and ensure that everyone has access to basic necessities(housing, education, healthcare).
Severe income inequality can result in workers being less productive, and the elderly(retired) not being able to earn incomes. If people are poor, they may be less healthy, less educated, and less productive.
All this would lead to social unrest which is why the government intervenes.
Effectiveness of Government Intervention
Government failure may occur
It may find it difficult to calculate the most efficient amount f public goods to supply
Decisions could be influenced by political factors and in some cases corruption
Economic efficiency could also be reduced due to reduced incentives
High taxes on income and high unemployment benefits may discourage people from working
High taxes on firms’ profits can reduce an entrepreneur’s ability and willingness to invest
