Mixed Economic System

Question 1

What is Demand for Labour?

Answer 1

The demand for labour represents all firms who wish to employ workers they are willing and able to employ at different wage levels.

Question 2

What is the Supply of Labour?

Answer 2

The supply for labour represents all individuals willing and able to work at different wage levels.

Question 3

Define Minimum wage

Answer 3

A minimum wage is the lowest remuneration that employers can legally pay their employees (the price level below which employees may not sell their labor.)

Question 4

What is the purpose of minimum wage?

Answer 4

The minimum wage is to protect workers so that they are paid a fair wage for a day’s work to ensure workers can afford basic necessities.

Question 5

Define Rules and Regulations

Answer 5

Rules can be described as the guidelines or instructions for doing something correctly. these are the principles that govern the conduct or behavior of a person in an organization or country.

On the other hand, regulations refer to the directives or statutes enforced by law, in a particular country.

Question 6

Advantages of Rules and Regulations

Answer 6

• Consumption of the good or service may be reduced.
• Awareness of the negative impacts of demerit goods (such as drinking and driving) can help to change the behavior of people in the long term.
• Awareness of positive impacts of consuming merit goods (such as education).

Question 7

Disadvantages of Rules and Regulations

Answer 7

• Restrictions can cause underground (illegal) markets to provide the good or service (at a high price).
• The government has no control over the quality of the goods produced in the underground markets which in some cases can be dangerous for consumption (Examples: illegally distilled vodka).
• People break rules - for example, underage smokers and alcohol drinkers can bypass the law by obtaining fake ID cards.
• The fine or punishment for ignoring the rules and regulations must be enforced and set sufficiently high to discourage consumption of the good or service.

Question 8

What is a Mixed Economic System?

Answer 8

A mixed economy is a combination of both the planned economy and the market economy. Resources are owned and controlled by both private individuals and the government. There is a private and public sector. The government provides many essential services such as state education, healthcare, public transport which benefit society and the economy as a whole, whereas private firms motivated by profit will provide goods and services demanded by consumers.

A mixed economy attempts to overcome the disadvantages of a market economic system by using government intervention to control/regulate different markets

Question 9

Causes of Market Failure

Answer 9

Under the provision of merit goods

Over provision of demerit goods

None of under-provision of public goods

Abuse of monopoly power

Factor immobility – Geographical and occupational immobility

Question 10

Define Merit goods

Answer 10

Private benefit + (-/+) externalities = Social Benefits

Merit goods are under-provided and under-consumed without government intervention and provision. Consumption of merit goods creates positive spillover effects for a third party.
The Private benefit < social benefits

Examples: Education, Healthcare services and, vaccination.

Government intervention: Direct provision of schools which is free (Law-In Bermuda a minor must be in school for a minimum of 13 years). Subsidies (example-solar panels in Bermuda)

Question 11

Define Demerit goods

Answer 11

Cause negative spillover effects when produced and consumed by 3rd party with government intervention. These goods are usually over-produced and over-consumed. Even if the government was to tax these goods they will still be purchased as these goods are inelastic are addictive (cigarettes - nicotine).

Private benefit > social benefit ——————- Private benefit + negative externality = social benefits

Examples: Alcohol, fast food, cigarettes, and recreational drugs.

Government intervention: Rules and regulations

Question 12

possible solutions to market failure

Answer 12

Maximum price

Minimum price

Indirect taxes

Subsidies

Rules and Regulations

Privatization

Nationalization

Direct Provision

Education

Question 13

Define Social Costs

Answer 13

True costs of Economic Activity. Includes private and External costs.

Social Costs = Private costs + External Costs

Question 14

Define Private Costs

Answer 14

The actual costs of a firm, household, or government.

Example: Taxi Driver pays for insurance, license, petrol, and car purchase.

Question 15

Define External Costs

Answer 15

The negative spillover effects incurred by 3rd party/no compensation is paid.

Example: Congestion + air pollution in taxi/secondhand smoke.

Possible government intervention would be sales tax which will raise the price of the product leading to a contraction in demand.

Question 16

Define Social Benefits

Answer 16

The total economic benefit to society of economic activity. Inclusion of private benefits (those undertaking it) and any external benefits it creates for others.

Social benefits = Private benefits + External benefits

Question 17

Define Private Benefits

Answer 17

Benefits of production and consumption experienced by an individual, firm, household, or government.

Example: Car owner benefits by owning means of private transport.

Question 18

Define External benefits

Answer 18

Positive side effects of production or consumption experienced by third parties = no money paid to a beneficiary.

Example: (services) Such as education, training, law enforcement, and vaccination.

Avoidance of negative externality

Question 19

Define Public Goods

Answer 19

These goods are non-excludable and non-rivalrous in consumption. These goods are under-produced or not produced at all. The private sector fails to provide these goods and services as they will not make a profit therefore there is no motivation to produce these goods.

Non-excludable means that no one can be excluded effectively from using the good.

Non-rivalrous means that consumption of the good by one individual does not reduce the availability of the good for consumption for others.

Private benefits < social benefits

Example: Lighthouses, Street lights, public roads (no compensation paid)
(street lights = less crime)

Government Intervention: Direct provision

Question 20

Define indirect taxes

Answer 20

Indirect can be levied indirectly on demerit goods and services to raise their market prices and discourage their consumption. An indirect tax is a tax on expenditure (sales tax) it is the responsibility of the firm to pay the tax to the government, therefore, increasing the costs of production.

Question 21

Advantages of indirect taxes

Answer 21

• Increases the price, so should reduce the quantity demanded (demerit goods).
• It generates tax revenue for the government which can be used to fund important goods and services.

Question 22

Disadvantages of indirect taxes

Answer 22

• The demand for cigarettes, alcohol, and petrol tends to be price inelastic, which means that the increase in price may have little impact on the consumption level of many people. Cigarettes that contain nicotine make smoking highly addictive and therefore most smokers will pay the higher price, so consumption will only change slightly.
• The indirect tax will be regressive, so will have a greater impact on low-income earners than high-income earners.

Question 23

Define taxes

Answer 23

A government can impose taxes that can be levied directly on profits or firms that pollute or processes that generate significant negative externalities, which will discourage production.

Question 24

Define subsidy

Answer 24

Can be used to encourage activities with significant external benefits. A subsidy will reduce production costs and increase profitability; thereby inducing increased supply, which in turn should reduce market prices o encourage greater consumption.

Examples: Public transportation, subsidized housing

Question 25

Advantages of subsidies

Answer 25

Allows producers to produce more of a good or service at cheaper costs. Increases the quantity demanded of that good or service due to the overall price decrease of that good or service.

Question 26

Disadvantages of subsidies

Answer 26

By the government granting subsidies (it gets costly), there will be opportunity costs (using the money towards education) or taxes will increases therefore taxpayers will have to pay more.

Question 27

Define direct provision

Answer 27

Ensures that the product will be provided, whereas the free market would lead to public goods not being provided at all. The private sector will not make a profit due to the goods being non-rivalrous and non-excludable. People indirectly pay for these goods and services through income tax Examples: Education, Healthcare, public libraries

Question 28

Advantages of direct provision

Answer 28

- The goods and services are accessible to all people in society, regardless of their income or social status. - Consumption of the good or service has private benefits for the individual and external benefits on the 3rd parties in society.

Question 29

Disadvantages of direct provision

Answer 29

- There is an opportunity cost as the money could have been spent on something else, such as paying off government debt or possibly reducing the rates of taxation. - Goods and services which are free of charge may be over-consumed, or long queues or shortages may arise. (example: The waiting list for hip replacement operations in a government hospital may be very long). - In the case of a shortage of supply caused by excess demand, it can be difficult to decide who should be able to take advantage of the free government service. - Some people (known as free-riders) are able to take advantage of free goods and services without contributing to government revenue by paying taxes.

Question 30

Define nationalization

Answer 30

The purchase of private sector assets by the government, bringing them into the ownership and control of the public sector. Examples: Public transport, telecommunication networks

Question 31

Advantages of nationalization

Answer 31

This can protect employment and promote economic stability in key industries.

Question 32

Disadvantages of nationalization

Answer 32

Low productivity and inefficiency: Due to the fact that government businesses are usually poorly managed, most nationalized businesses by the government end up being mismanagement and that reduces efficiency of the business.

Question 33

Define Privatisation

Answer 33

The transfer of the ownership of assets from the public sector to the private sector.

Question 34

Advantages of Privatisation

Answer 34

Improved efficiency - The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient.

Question 35

Disadvantages of privatization

Answer 35

Higher Costs to Consumers Although privatization is usually promoted on the basis that it will reduce consumers' costs, it can also drive costs up.

Question 36

Define minimum price

Answer 36

A minimum price occurs when the government sets a price above the market equilibrium price in order to encourage the output of a good or service.

Question 37

Define maximum price

Answer 37

A maximum price occurs when the government sets a price below the market equilibrium price in order to encourage consumption.

Question 38

Define Abuse of monopoly Power

Answer 38

Without government control, certain private sector firms could grow to become monopolies and exploit their market power by charging higher prices or reducing supply. In general, profit-maximizing monopolists lack incentives to be competitive, so create inefficiencies in the market. Example: Belco - they must apply to the Energy Commission to request permission to increase prices.

Question 39

Define Occupational immobility

Answer 39

This occurs when it is difficult to move a factor of production from one type of work or job role to another. Example: A skills mismatch can lead to structural unemployment

Question 40

Define Geographical immobility

Answer 40

This occurs when it is difficult to move a factor of production from one geographical location to another. Example: Workers (labor) may not be willing to move to another part of the country due to family and social ties. The actual costs of moving (not enough money to cover the costs of moving). Governments may build factories in high unemployment areas and offer tax breaks/subsidies to attract firms to the area.

Question 41

Define education (government intervention)

Answer 41

To correct market failures, the government can insist that schools educate students about the negative side-effects of smoking. In many countries, cigarette packets must carry a government health warning which clearly explains the dangers of smoking. The aim of this is to educate and shock people in order to discourage them from smoking. Example: The Australian Government has made it a legal requirement for cigarettes to be sold in packets covered with negative images about smoking.