The role of the Gov in the mixed economy Flashcards
three basic questions of resource allocation
what to produce, how to produce, and for whom to produce
Resource allocation: What to Produce
- born out of the inherent scarcity of resources
- Influencing Factors in Production Choices:
Resource Availability: e.g a country rich in oil will likely focus on petroleum production.
Consumer Preferences: Producers must stay attuned to changing trends and preferences to remain relevant and profitable.
Technological Capabilities: Technological advancements can open up new possibilities for production, making previously unviable goods feasible and desirable - Case Study: Shift in Automotive Industry: The automotive industry’s pivot towards electric vehicles, influenced by environmental concerns and advancements in battery technology, reflects a significant shift in production priorities.
Resource allocation: How to Produce
- about choosing the most effective and efficient production methods
- Influencing Determinants in Production Methods:
Resource Efficiency: Methods that maximize the utility of available resources while minimizing waste are preferred.
Cost and Quality Balance: Producers often have to balance between cost-efficient methods and maintaining product quality.
Environmental Concerns: With growing awareness of environmental issues, sustainable and eco-friendly production methods are gaining prominence. - Case Study: Sustainable Agriculture: The rise of organic farming practices illustrates a shift towards more environmentally sustainable and health-conscious production methods in agriculture.
Resource allocation: For Whom to Produce
- About determining the allocation of resources among different segments of society
- Factors Influencing Allocation:
Income and Wealth Distribution: dictates who can afford what goods and services.
Cultural and Social Norms: can influence who is deemed eligible or prioritized for certain products.
Government Intervention: particularly important in providing public goods and services.
Case Study: Public Education Systems: Provision of free or subsidized education in many countries showcases how governments allocate educational resources for the benefit of society.
Different economic systems approaches to resource allocation (how to answer the three basic questions):
- Market economy: are predominantly answered by the forces of supply and demand. Consumer preferences, along with producers’ profit motives, drive these decisions
- Command economy: The government decides production goals, methods, and allocation based on planned objectives e.g. North Korea focus on military and essential goods
- Mixed economy: Governments intervene to varying degrees in economic decisions, often to regulate or provide public goods
Non market forces
Those acting on economic factors from outside a market system
- Most important non market force is the Government
- its actions are not driven by profit or self-interest, instead with with societal goals in mind
Actions the Gov takes in a mixed economy
- Regulation: The government enforces laws and regulations to ensure fair competition and protect consumers.
- Redistribution: Through taxation and spending, the government redistributes wealth to address inequality and promote welfare.
- Market Failure Correction: Interventions aim to correct market failures like pollution or inadequate public goods provision.
- Macroeconomic Stabilization: Policies manage demand, stabilize prices, and promote employment.
- Infrastructure and Public Goods: Government invests in infrastructure and provides public goods.
- Legal Framework: Establishes and enforces laws for property rights, contracts, and dispute resolution.
Market failure
a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value.
- Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
business cycles and market failure
Business cycles are seen as a proof of market failure, and justify government intervention in order to assure the correct level of economic activity. Until the optimum level of employment has not been reached, the economy will not be readjusted. Depending on the cycle phase, expansionary or contractionary economic policies may be used.
Externality
- The price system does not include all the costs and benefits of production and consumption of a good.
- Whenever supply and demand do not fully reflect all the costs and benefits of production and consumption, the price system cannot be expected to bring about an efficent allocation of resources.
Public goods
good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others.
- the provision of public goods contributerd to a nation’s SoL as they accomodate positive externalities
- include knowledge, official statistics, national security, common languages, law enforcement, public parks, free roads, television, radio broadcasts, Flood control systems, lighthouses, and street
- closely associated with the free rider problem, a type of market failure
Coasian solution to the free rider problem
A Coasian solution, named for the economist Ronald Coase, proposes that potential beneficiaries of a public good can negotiate to pool their resources and create it, based on each party’s self-interested willingness to pay. His treatise, The Problem of Social Cost (1960), argued that if the transaction costs between potential beneficiaries of a public good are low—that it is easy for potential beneficiaries to find each other and organize pooling their resources based upon the good’s value to each of them—that public goods could be produced without government action.
merit goods
- What constituents a merit good is defined by the political process according to what the Government deems to be socially desirable.
- Musuems, ballet, the arts, libraries,
- Thery facilitate a redistributinof of real incomeas merit gods are largely financed out of progressive taxation; poor people get a SoL they could not otherwise afford
- By making these goods readily available below the market clearing price society can take advantage of positive externalties and achieve a higher SoL
demerit goods
- goods that throuigh the political process are deemed socially undesirable
- the net private cost to the consumer is not fully recognised at the time of consumption
- key characterists include overconsumption, negative externalties, and information failure
- For example, if a driver consumes excessive alcohol and then crashes into an innocent driver causing damage to their vehicle, a negative consumption externality has arisen. Society has suffered because the actual benefit of drinking by some has reduced the benefits possible (from driving) to others. This reduces the Marginal Social Benefit (MSB) by the extent of the negative effect on others, so that the socially efficient consumption of alcohol is less than the free market level of consumption.
- tobacco, alcoholic beverages, recreational drugs, gambling, junk food, and prostitution.
Scotland Minimum Unit Price (MUP) for alcohol
- In May 2018 Scotland became the first country to set (MUP) for alcohol – initially at 50p per unit. minimum price for a 500ml can of lager and for a bottle of red wine were set at £1, and £4.69
- by June 2019 alcohol consumption in Scotland was its lowest since 1994. Alcohol consumption per head, by volume, fell on average a by 9% during 2018.
