Chapter 15: Mixed Economy

Question 1

Mixed economic system

Answer 1

An economy in which both the private and public sectors play an important role.

Question 2

Benefits of government intervention

Answer 2

• Can ensure the provision of needed public services
• Can change consumption patterns – discourage demerit goods, encourage merit goods
• Can provide public goods
• Can prevent monopolies from exploiting consumers
• Can provide a social safety net for the most vulnerable

Question 3

Types of government intervention: Maximum prices

Answer 3

A government may set a maximum ceiling on the price in order to enable the poor to afford basic necessities. To have any impact, a maximum price has to be set below the equilibrium price. The problem is, however, that a shortage will be created as at this lower price the quantity demanded exceeds the quantity supplied. To prevent the development of an illegal market in the product, some method of its allocation will have to be introduced. This might be through queuing, rationing, or even a lottery.

Question 4

Rationing

Answer 4

A limit on the amount that can be consumed.

Question 5

Lottery

Answer 5

The drawing of tickets to decide who will get the products.

Question 6

Types of government intervention: Minimum prices

Answer 6

To encourage production of a product a government may set a minimum price. This is a price floor, as it represents the lowest price producers are allowed to charge. To have an impact on a market, this will have to be set above the equilibrium price. The problem created is a surplus, with the quantity supplied being greater than the quantity demanded. To prevent the price being driven down, the surplus will have to be bought up by the government or some other official body

Question 7

Types of government intervention: Others

Answer 7

Subsidies and taxes
Competition Policy
Regulation
Nationalisation and Privatisation
Direct Provision
Policies to address inequality