Chapter 2.11 Mixed economic system Flashcards
define a mixed economy
An economic system in which some resources are allocated by the market forces of supply and demand, but there is also government intervention
What two types of price controls are there?
Maximum and minimum prices
What are the different types of government intervention?
-Price controls- max and min
-Indirect taxes and subsidies
-Competition policies
-environmental policies
-regulations
-Nationalisation and Privatisation
-Direct provision
What is a price floor/minimum price?
A legally enforced minimum price for a given market. This is usually set to encourage production of a product.
Where does the price have to be set to for minimum price to have an impact on the market?
above equilibrium price
How may a government limit firm’s ability to set their own prices?
By setting price controls
What happens to demand and supply at the new higher price (pmin)?
a contraction in demand- fewer consumers wish to buy the good
an extension in supply- more producers wish to sell
What do price floors create
surpluses as Qs>Qd.
There is a fall in quantity sold from q1-qmin.
What are the impacts of a minimum price?
Prices should typically fall to restore equilibrium due to a surplus.
Since this cannot happen, the market remains in a state of disequilibrium and there is a misallocation of resources
In what situations/markets might a minimum price be set?
-Discouraging consumption of demerit goods
-minimum wages to ensure workers are paid a fair amount
-support producer incomes
What is a price ceiling/ maximum price?
A legally enforced maximum price for a given market.
Where must the price have to be set for maximum price to have an impact on the market?
below the equilibrium price - has the effect of lowering the price below equilibrium
What happens at the new lower price as a result of price ceiling?
Extension in demand - more consumers wish to buy the good
Contraction in supply- fewer producers wish to sell
What do price ceilings cause?
a shortage. There is an overall fall in quantity sold
What are the impacts of maximum pricing?
Prices should typically rise to restore equilibrium
Since this can’t happen, the market remains in a state of disequilibrium and there is a misallocation of resources.
In what situations/markets might a maximum price be used?
To encourage consumption of merit goods.
To support lower incomes
rent control
What aspects of free market economies are implemented in mixed economies?
-Individuals are rewarded for efforts/talents- there is still strong incentive to work hard, set up companies etc.
-Large role of the private sector ensures competition - drives down prices and improves quality and efficiency
-It is still producers who decide what, how and for whom to produce- decisions are ultimately driven by consumers wants and needs (sovereignty)
Are mixed economies planned?
no- it is still producers who decide what, how and for whom to produce- decisions are ultimately driven by consumers wants and needs (sovereignty)
What aspects of a mixed economy are implemented to avoid the cons of free market economy?
-Govt. can use methods of government intervention to prevent market failure:
-indirect taxing and subsidies- merit and demerit goods
-regulations
-direct provisions- public goods
-labelling and providing product information- information failure
-Improving infrastructure and education to improve mobility
Define indirect taxes
a tax per unit of output
Who pays for the indirect taxes placed on goods?
The producer- represents an additional cost, shifting supply to the left
It is passed on (at least in part) to the consumer in the form of higher prices
What markets are taxes likely to be imposed on?
Demerit goods
Goods with external costs
What do taxes cause?
an increase in price and a fall in quantity sold
raises tax revenue for the government
Define subsidies
A payment by the government to producers per unit produced
How is tax revenue calculated?
Ptax-pp x qtax
per unit tax x qtax
What markets are subsidies likely to be used in?
Merit goods- those with external benefits
Markets threatened by foreign competition
What do subsidies involve?
An opportunity cost- Requires government spending to fund them. This money could have been spent differently
Who receives subsidies?
Producers- represents a fall in costs, shifting supply curve to the right
Passed on (at least in part) to the consumers in the form of lower prices
What does the incidence of taxes or subsidies depend on?
elasticity
What do subsidies cause
A fall in price and an increase in quantity sold
What is tax incidence?
How much of the total tax revenue is contributed by consumers- paying high prices
and how much is contributed by producers receiving lower prices
What does it mean when producer incidence and consumer incidence are equal?
unit elasticity
Why is consumer tax incidence higher when Price elasticity is inelastic?
because if producers know that consumers are insensitive to price changes, they can pass on a lot of the tax to consumers in the form of higher prices without losing revenue.
When demand is inelastic, there is a larger tax burden on ________, or in other words there is higher ____________.
consumers
consumer tax incidence
When demand is elastic there is a larger tax burden on ___________, or in other words there is higher ___________
producers
producer tax incidence
Why is producer tax incidence higher when demand is elastic
If producers know that consumers are sensitive to price changes, they know that passing on the tax will cause a large fall in qsold/demanded. Therefore they choose to absorb some of the tax themselves.
What is competition policy?
Policies which seek to promote competitive pressures and prevent firms from abusing market power
What does competition policy prevent?
monopoly power
What are examples of competition policy
-prevention of mergers that are not in the best interest of consumers
-removal of barriers to entry into markets
Regulation of monopolies and prevention of uncompetitive practices
e.g predatory pricing (driving a rival firm out of the market by lowering price) Limit pricing (discouraging the entry of new firms into the market by setting price really low)
What are environmental policies
Policies designed to improve environmental conditions and address external costs from firms
What are examples of environmental policies?
-Placing restrictions on the amount of pollutants emitted by the firm
-fining firms which exceed limits
-Tradable permits
What are tradable permits
Governments issue permits allowing firms to pollute up to a certain limit.
If firms exceed this limit, they must buy more permits from other firms. If they pollute less, they can sell permits.
This system is incentive-driven, encouraging firms to reduce pollution cost-effectively.
What do tradable permits do for clean firms and polluting firms?
Clean firms: sell most of their permits- reduced costs- higher market share
Polluting firms: Buy other firm’s permits- higher costs
Define regulations
Rules and laws which place restrictions on the activities of firms
What may a government regulate?
-target audience for a product (e.g no underage drinking)
-Quality of products made
-mode of staff management
What are the advantages and disadvantages of regulations?
Advantages:
backed by law and easily understood
Disadvantages:
Govt. has to check that the rules and laws are being followed- expensive, difficult
Only works if most people agree and comply
Do not directly compensate those who suffer as a result of market failure
May be too restrictive- reduces market flexibility & creates barriers to entry into markets.
Examples of regulations
-govt. passing a law banning the sale of cigarettes to children
Define nationalisation
Moving the ownership and control of an industry from the private sector to the government.
Define Privatisation
The transfer of ownership and control of firms/assets from the state (public sector) to the private sector
What are industries owned by government known as
state-owned enterprises and public corporations and
State owned enterprises vs. public corporations
A state-owned enterprise (SOE) is a business owned and operated by the government. It may provide goods or services to the public but is managed by the government. Examples include nationalized industries like railways or electricity.
A public corporation is a government-owned entity that operates like a private business, with its own management and is typically run for profit. It sells shares to the public. Examples include Royal Mail or BBC in some countries.
Where do funds come from for SOEs
typically from government budgets (taxpayer money) and sometimes loans or bonds issued by the government.
Where do funds come from for Public corps?
a combination of government funding (initially or for specific projects) and revenues generated from their business activities.
Chairman and board appointed by govt.
Advantages of S.O.E
-Base their decisions on full costs and benefits involved
-Can be used to influence economic activity
-In some cases its more practical to have only one firm in the industry e.g railways- S.O.Es wouldn’t abuse its power
-Aims to ensure low prices & good quality
Disadvantages of S.O.E
-Difficult to manage and control- large scale organisation
-May become inefficient- low quality and relatively high prices due to lack of competition
-Need to be subsidies if theyre making losses
What are arguments in favour of privatisation?
market forces and incentive as a result of them make private firms likely to produce products desired by consumers at low cost and low prices
What do funds available depend on for private firms?
profits they earn and their ability to convince shareholders and lenders of their success
What are advantages of privatisation?
Greater choice
Freedom from government regulations may reduce administration costs
Less risk of under-investment
Increased Efficiency: Private firms have a profit incentive, leading to better management and cost reductions.
Improved Service Quality: Competition encourages firms to improve quality and meet consumer demand.
What are some disadvantages of privatisation?
No guarantee that firms will face full pressure of market forces: 1. monopoly powers 2. missing markets
They may not take into account full costs and benefits to society- external costs & benefits - over/underconsumption
What is direct provision? Examples?
When the government provides essential goods and services directly to the public rather than relying on private firms
Healthcare: the NHS in the UK provide free healthcare
Education: public schools are government funded
What does direct provision ensure?
access to necessary service, especially when the free market fails to supply them efficiently or fairly
What problems does direct provision address?
Underconsumption of merit goods
Public goods issue
Poverty and welfare concerns
Market power and exploitation
