chp 13 Flashcards
What is a market economic system
A market economic system is where most resources are owned and controlled by individuals and are allocated through market forces. The role of the government is confined to overseeing and enforcing the basic principles of demand and supply.
In reality, there is no example of an economic system that is entirely dependent upon market forces to allocate resources. The following economies are the closest to this ideal - Singapore, Hong Kong, the United States, New Zealand and Switzerland. All are developed economies.
Identify which of the following may be found in a market economic system:
i a US-owned manufacturer of fizzy drinks
ii local owners of market stalls a state-owned steel producer
iv a former nationalised electricity provider v an airline owned by a local entrepreneur vi a railway system that requires substantial subsidy.
Sample answer:
The businesses found in a market economic system are (i), (ii), (iv) and (v).
Private sector
Private sector: businesses owned by individuals or shareholders.
Public sector
Public sector: the part of the economy controlled by the government.
Moving to a market economy
When moving to a market economy, the government’s policy is always to reduce the
Section 2. The allocation of resources
relative size of the public sector and increase the relative size of the private sector. This is often achieved through privatisation, whereby there is a sale of public sector assets to the private sector: Privatisation has been prevalent in many developing economies in recent years. Typical examples are China, India and Pakistan.
Advantages of a market economic system
• It is responsive to changes in consumer demand.
• Price mechanism is an efficient way of allocating resources.
• Competition promotes efficiency and low prices.
• Quality is high and innovation is encouraged.
Disadvantages of a market economic system
Market failure occurs when market forces do not work well.
• Environmental damage may result due to lack of government regulations.
• Differences in income and wealth are likely to widen over time.
• Social policies to protect the more vulnerable groups are likely to be limited.
From an economy you have studied, give an example of:
i a private sector business ii a public sector business ili
a business that has recently been privatised.
Typical examples are:
McDonald’s railways steel production.
Why does a market economic system not necessarily take into account: environmental problems generated by private firms i a need to reduce inequality?
Private firms do not have to pay directly for the environmental protons they cause. Also, there may be no regulations restricting such problems. It is therefore easiest and cheapest for firms to discharge waste into rivers, the atmosphere or landfill.
It is the governments responsibility to reduce inequality. In a market system, there are no such policies due to a lack of government intervention.
2015, the International Monetary Fund classified Pakistan as an ‘emerging market economy. Explain why this is so.
An emerging market economy is not only a developing one but also one where the private sector and the free market have an increasingly important role to play.
• Pakistan has gone through, and continues to go through, a process of privatisation, especially of former state-owned manufacturing and utility services providers.
• The market has also been through a process of deregulation in order to encourage more competition.
Discuss whether or not a market economic system is the best form of organisation for a developing economy.
• Advantages are efficient resource allocation, increased competition, innovation and the market being more responsive to customer needs.
• Disadvantages are market failure due to lack of regulations, widening inequality of income and wealth, and less government provision of social welfare services.
• Any economy has to weigh up the respective importance of the advantages and disadvantages,
Singapore is a very good example of a market
economic system. What is the most likely reason for this?
Over 85% of its economy is owned by the private sector
Which is not a characteristic of a market economic system
The price of some food products is fixed by the government
I a
