Mixed economic system(Chapter 15) Flashcards
Definition of a mixed economic system
A mixed economic system combines government planning and ownership of resources with the use of free market economic system to determine the allocation of resources in the economy.
the ownership of resources in a mixed economy is divided between private sector(private firms) and public sector(govt).
What does the government do in the mixed economic system
- Employing FOP to produce and supply goods tat private firms arent able to provide because they arent provide
- provide welfare benefits to poor so they can buy goods and services they need from private firms who will supply these goods at high prices
- support people who are unemployed as private firms are unable to fine a profitable use for them(such as giving them financial support and retraining)
- ban the production and sale of harmful goods
- Create laws to protect the environment
- Intervene in markets to address market failures(taxes, subsides and regulations)
How can government correct market failures
Consequences of market failure and how the government can “correct” it.
Public goods will not be supplied -
The government can pay for the provision of public goods including street lighting, policing and flood defense’s, using money collected form taxes.
Too few merit goods will be supplied and consumed - The govt. can directly employ FOP to increase the supply of healthcare and education available to people. Their provision can be paid form taxes so they can be provided for free so that everyone is able to consume them.
Demerit goods will be over-supplied and consumed - The govt. can ban the production and sale of demerit goods or raise their prices using indirect taxes. It may set high minimum prices in the market for demerit goods and other goods that create significant external costs.
Some firms may exploit their consumers and employees - Govt. can regulate the behavior’s of large powerful firms that may abuse their market power. It may also take over the ownership and running of large powerful firms from the private sector using a process called nationalization. The introduction of employment laws and minimum wage laws to protect the working conditions and wages of low-paid workers.
Factor immobility obstructs the ability of firms to allocate resources efficiently - Govt. can provide education and retraining for workers who are occupationally immobile because they do not have relevant skills. It can also encourage private firms to move to areas of high unemployment by subsidizing their costs.
Goods and services with significant external costs may be over-provided - Indirect taxes can be used to raise the market prices of goods and services with significant external costs so that demand for them contracts.
Goods and services with significant external benefits may be over- provided - Subsidies can be paid to private firms to reduce the costs of producing goods and services with significant external benefits. This will encourage them to increase the supply of these goods and services.
State-owned companies and nationalization
Many governments operate state-owned enterprises to supply goods and services directly to consumers that are considered essential or too important to be provided solely for profit by private sector firms.
Many state-owned enterprises have been created through nationalization, where a govt. takes over the ownership of private sector companies or even industries. To allows a Govt. to have direct control over the market supply and prices of the goods they provide. For example, bus and train services are nationalized in many countries.
Why are some industries nationalized?
- -Nationalization controls private sector monopolies, ensuring fair supply and prices of essential services like electricity, gas, and water.
- It protects jobs by preventing large firms from closing down when they fail to make a profit.
- Nationalization safeguards national security by placing dangerous industries like nuclear energy under government control.
- It keeps crucial industries in the hands of the state to ensure economic stability and output.
- Nationalization preserves public services, allowing them to operate even at a loss, such as postal and rail services in rural areas.
- Some governments nationalize industries for political reasons, preferring state control over private sector dominance.
Regulations and price controls
They are legal rules created by the govt. to control the way something is done or the way people/firms behave. People to don’t comply to these regulation could have to pay significant fines.
They are used to
- To set minimum service standards, like product saftey and quality, delivery time and consumer complaint procedures.
- To control market prices
- To protect the environment(for example. a ban on testing cosmetics on animals)
- To ban/limit the production or consumption of demerit goofs which create significant external costs.
Price controls are the legal minimum or maximum prices set by the government in the market for certain goods or services.
Setting maximum prices
Some private sector firms looking to exploit the consumers with charging high prices, the government can intervene and use regulations to cap the prices they can charge by setting a maximum price they cannot exceed.
they are used by govt for essential products to make them more affordable to people with low incomes.
Setting minimum prices
A govt. may regulate to raise the prices of demerit goods in an attempt to reduce their consumption. Govt may force private firms to charge higher prices for products that cause excessive pollution.
Minimum prices can help to cut the demand for products that result in significant external costs when they are produced or consumed, such as pollution and litter or harm to animals and the environment. For example, compulsory charges have also been introduced for plastic carrier bags in a number of countries to reduce their use and cut harmful waste.
Many governments have also introduced a legal minimum wage to prevent employers from paying some groups of workers very low wages.
Indirect taxes
The are additional costs for production that private firms must pay to the govt. With this tax they have to raise the price of their products, which then decrease demand making their production and sale less profitable. The aim of indirect taxes is to reduce both consumption and production of the products that have such taxes.
Subsides
A subsidy is financial support/payment by the govt. to private firms to encourage desirable activities. Subsides are usually paid as non-repayable grants but may also include tax reduction and low cost loans. They are usually targeted at firms that provide products that have significant external benefits that are considered socially and economically important. All subsided can reduce costs increasing the market supply of the product they target shows through a downward shift in their market supply curve.
Problems created by Govt. Intervention
- Slow implementation and impact of interventions.
- Price controls may lead to smuggling and black markets.
- Taxes, subsidies, and policy measures can distort price signals and incentives.
- Regulations increase production costs and prices.
- Public sector organizations may be inefficient and produce poor quality goods and services.
- Government interventions can cause conflicts of interest.
- Interventions may be influenced by political and personal choices, rather than the best interests of society and the economy.
Increasing the role of markets in mixed economies
- Privatizing state-owned enterprises and transferring public sector activities to private firms.
- Encouraging private sector growth by removing regulations and cutting taxes on businesses.
- Reducing the size of the public sector to lower costs and potentially decrease taxes.
- Promoting efficiency and resource allocation through the profit motive of private sector firms.
- Fostering competition among private firms to improve product quality and lower prices.
- Private sector firms can be more entrepreneurial and create more jobs, incomes, and economic output.
