The Mixed Economy Flashcards
What is the private sector
The private sector is the part of the economy where all businesses are owned by individuals
What is the public sector
The public sector is the part of the economy where all businesses are owned by the government
What are the differences between the public and the private sector
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
What are the three types of economic systems
Free market economy
Command economy
Mixed economy
What is the free market economy
The free market is an economy where all businesses are owned by private individuals. These resources are allocated through the price mechanism
What is a command economy
A command economy is an economy where all resources are owned by the government. These resources are allocated through state control
What is a mixed economy
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
Why does the free market fail
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
In what areas does the free market fail
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
What are private goods
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
What are public goods
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
What is the free rider problem
The free rider problem occurs when someone can get the benefits of a good without paying for it
What are merit goods
Merit goods are goods that benefit society and have positive externalities
What are demerit goods
Demerit goods are goods that are bad for society and have negative externalitites
What are the advantages of the mixed economy
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
What are the disadvantages of a mixed economy
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
What is nationalization
Nationalization is the sale of firms to the public sector
Why are industries nationalized
To control natural monopolies
For safety
To protect employment
To maintain a public service
What is privatization
Privatization is the sale of state owned firms to the private sector
What are the reasons for privatization
To generate income
To increase efficiency
To increase competition
To reduce political interference
What are the advantages & disadvantages of privatization to consumers
Advantages:
Better quality & lower prices
Lower taxes
Bigger variety
Disadvantages:
Non profitable parts of a business close down, so absence of goods
Excludability
What are the advantages & disadvantages of privatization to workers
Advantages:
Increased salaries if company makes profits
Increased skills
Fringe benefits
Disadvantages:
Job losses
Loss of job security
Increased responsibility
What are the advantages & disadvantages of privatization to firms
Advantages:
Increased profits
Access to factors of production
Disadvantages:
Possibility of loses
If firms become a monopoly, authorities will investigate their activities
What are the advantages & disadvantages of privatization to the government
Advantages:
Increased revenue from sale of state assets
Increased tax revenue
Disadvantages:
Loss of a stable source of revenue
