The Mixed Economy

Question 1

What is the private sector

Answer 1

The private sector is the part of the economy where all businesses are owned by individuals

Question 2

What is the public sector

Answer 2

The public sector is the part of the economy where all businesses are owned by the government

Question 3

What are the differences between the public and the private sector

Answer 3

The aim of the public sector is the welfare of the people while the aim of the private sector is profit
The public sector is owned by the state while the private sector is owned by individuals

Question 4

What are the three types of economic systems

Answer 4

Free market economy
Command economy
Mixed economy

Question 5

What is the free market economy

Answer 5

The free market is an economy where all businesses are owned by private individuals. These resources are allocated through the price mechanism

Question 6

What is a command economy

Answer 6

A command economy is an economy where all resources are owned by the government. These resources are allocated through state control

Question 7

What is a mixed economy

Answer 7

A mixed economy is an economy where all resources are owned by both the government and private firms. These resources are allocated through the price mechanism with some state control

Question 8

Why does the free market fail

Answer 8

The free market fails because its not able to allocate resources efficiently. This is because economic agents only have their private interests in mind and fail to allocate resources in the best way for society

Question 9

In what areas does the free market fail

Answer 9

The private sector only cares about their own costs and benefits, ignoring costs and benefits to third parties.
Goods aren’t provided adequately for society. Some would be underproduced, overproduced while some wouldn’t be produced at all

Question 10

What are private goods

Answer 10

Private goods are goods that carry the characteristics of excludability and rivalry. This means that consumption by one will lead to the good not being available for others, and that consumers will be excluded form receiving their benefit if they can’t pay

Question 11

What are public goods

Answer 11

Public goods that are non-excludable, meaning that once they have been provided you can’t stop others from benefiting from them as well. An example is street lighting and defence

Question 12

What is the free rider problem

Answer 12

The free rider problem occurs when someone can get the benefits of a good without paying for it

Question 13

What are merit goods

Answer 13

Merit goods are goods that benefit society and have positive externalities

Question 14

What are demerit goods

Answer 14

Demerit goods are goods that are bad for society and have negative externalitites

Question 15

What are the advantages of the mixed economy

Answer 15

1) The government provides public and merit goods that would have normally not been provided by the private sector
2) Government supervision. The government supervises and controls the price of necessities to ensure that they are available to everyone and they don’t rise excessively
3) The government prevents people from consuming harmful goods that have negative externalities by making them illegal or taxing them
4) More equal distribution of income and wealth. The government gives money or provides basic needs to those that can’t afford to pay for them
5) Greater environmental care. The government prevents people from harming the environment through fines and taxes
6) Less unemployment, as government creates jobs by employing people in their offices

Question 16

What are the disadvantages of a mixed economy

Answer 16

1) Higher taxes. In order for the government to provide goods and services, they need to cover the cost of doing so by raising taxes. Higher taxes tend to discourage people form working hard, as part of their income is taken from them, resulting in a fall in productivity

2) Provision in the public sector may be inefficient. The public sector is not driven by profit and employees thus do not feel motivated to work as hard. This leads to a fall in productivity in the public sector

Question 17

What is nationalization

Answer 17

Nationalization is the sale of firms to the public sector

Question 18

Why are industries nationalized

Answer 18

To control natural monopolies
For safety
To protect employment
To maintain a public service

Question 19

What is privatization

Answer 19

Privatization is the sale of state owned firms to the private sector

Question 20

What are the reasons for privatization

Answer 20

To generate income
To increase efficiency
To increase competition
To reduce political interference

Question 21

What are the advantages & disadvantages of privatization to consumers

Answer 21

Advantages:
Better quality & lower prices
Lower taxes
Bigger variety

Disadvantages:
Non profitable parts of a business close down, so absence of goods
Excludability

Question 22

What are the advantages & disadvantages of privatization to workers

Answer 22

Advantages:
Increased salaries if company makes profits
Increased skills
Fringe benefits

Disadvantages:
Job losses
Loss of job security
Increased responsibility

Question 23

What are the advantages & disadvantages of privatization to firms

Answer 23

Advantages:
Increased profits
Access to factors of production

Disadvantages:
Possibility of loses
If firms become a monopoly, authorities will investigate their activities

Question 24

What are the advantages & disadvantages of privatization to the government

Answer 24

Advantages:
Increased revenue from sale of state assets
Increased tax revenue

Disadvantages:
Loss of a stable source of revenue