Topic 3: Economic Systems: Mixed Economy Flashcards
What is a market economy?
Resolves the basic economic problems of what? How? And for whom? To produce mainly through the market mechanism
Market economy characteristics
Private ownership: private individuals own nearly all the factors of production. Business enterprises and other organisations also own factors of production, particularly land and capital. However, in turn l, individuals own the businesses enterprises and other organisations
Free enterprise and choice: owners of the factors of production as well as producers of goods and services have the right to buy and sell what they own through the market. A government places few limits on what can be bought and sold. Workers can work for whomever they want. Homeowners can sell their houses if they wish, people are free to set up their own businesses consumers may buy whatever
Competition:competition exists if economic units are free to use their resources as they wish. Producers have to compete for the spending votes of consumers. Workers have to compete for the spending votes of their employers
Motivation: consumers and producers are motivated by pure self- interest or private gain. Consumers aim to maximise their individual welfare or utility. Producers aim to maximise their profits. Government is motivated by the considerations of the good of the community
Decentralised decision making: decision making within the market economy is decentralised, because individual economic agents are free to choose how they wish to allocate their resources. There is no supreme agent that decides the allocation of resources
Advantages of market economy
It works automatically: the market system is like a marvellous computer registering people’s preferences for different goods, who will get the final goods. So, through the motivation of self- interest the three problems inherent in the economy are solved automatically
Choice: consumers are faced with a wide range of choices. Enterprises compete with each other either in price if goods are homogeneous or Ona wider range of factors such as quality of goods are not homogeneous
Innovation: Market economies have strong incentives, in terms of material gain and profits, to innovate and produce high quality goods. Enterprises that fail to do are likely to be driven out of business.
Economic growth: a free market economy is very dynamic because of the driving forces of profits and the checking forces of competition. Continuous growth, such as price and exchange rate stability and in preventing monopoly powers
Distribution of income and wealth: In purely free market economy, resources are allocated to those with spending power. Individuals with no source of income can pay the ultimate penalty for their economic failure- they die- from starvation and or cold or disease. This fear of economic failure and its price is a major incentive within the free market system
Risk: individuals take great care to reduce economic risk, which is inherent to market economies. They can overcome the problem of risk by insuring themselves. Like they belong to medical aid schemes. Unemployment and sickness can also be insured against. To cope with the problem of old age, individuals ensure that they have pension schemes
Disadvantages of market economy
Choice: In a market economy, there may be plenty of goods in the shops but they may be out of the price range of the poorest in society. Consumers choice may be distorted by extensive persuasive advertising
Competition: most markets lack complete consumer sovereignty. In reality, they tend to be dominated by oligopolistic and monopolistic competition. Price collusion and other unlawful methods disadvantage consumers and create imperfect markets. Market participants manipulate the market through advertising and other forms of marketing
Income and wealth: In a purely fee market economy, there is no link whatsoever between needs and the allocation of resources . The unemployed can starve, the sick can die for lack of medical treatment, and the homeless can freeze to death on the streets. Income is allocated to those with capital or wealth
Risk: Only a small percentage of the population has enough foresight or the income to insure themselves adequately against mishaps. This then means that many in a market economy become poor, perhaps unable to support themselves
Externalities: Manufacturers do not consider, for instance the soot which falls from their factory chimneys onto nearby washing lines. It is including some natural resources because it’s free and belongs to no- one in particular it’s destroyed by over exploitation or careless use
What is a centrally planned economy?
When resources are allocated by government through a planning process
Characteristics of centrally planned economy
Ownership: All factors of production except labour are owned by the state. Labour services are directed by the state. There is no private property. All private property has been nationalised. Nationalisation is a practice to strengthen this characteristic
Motivation: Consumers, enterprises and government are all assumed to be selfless, cooperating together to work for the common good or for the good of the community. This is in market contrast with most economic agents in market economies who are assumed to be motivated only by their self interest
Planning: resources are allocated through a planning process meaning that the state directs labour into jobs and directs consumers on what to consume They direct producers on what to produce determining the choice of goods available to consumers
Advantages of centrally planned economy
It works intentionally: The allocation of resources is not left to the unpredictable and incidental thrills of a market. If an unequal distribution of income is desirable it’s allowed for when planning what to produce and in rewarding the producers
Needs are catered for: planning ensures that adequate resources are devoted to community, public and merit goods
Wastage is limited: resources used for the production of unconsumed goods and unused services are wasted. In the centrally planned economy, wastage as a result of competition is prevented
Mass production: mass production are secured because of the use of monopoly enterprises. Like one producer produces only soap powder, all consumers use the same kind of washing powder but quantities are limited
Advertising: advertising is used to inform in the planning economy, rather than simply to persuade or brainwash
Externalities: planning may allow explicitly for externalities
Full employment: all workers, in order to use their labour, are employed even if it may be unprofitable
Disadvantages of a centrally planned economy
Choice: consumers have relatively little choice. Workers may be allocated jobs in particular occupations or in a particular geographical areas, there is no mechanism by which enterprises compete with each other to provide different types of the same food when there is only one make of something like a car. Queuing is the rule and what is available for purchase in shops is most instance poor quality
Motivation: It is difficult to provide sufficient incentives for enterprises and individual workers to produce good quality products. Production targeted are often set in volume terms or in value terms. State shops have to sell what is supplied. There is every incentive for individuals to minimise the amount of effort they put into their official work
Economic growth: The experience in the 1970s and 1980s in Eastern Europe was that planned economies had consistently failed to match the growth performance of market and mixed economies which was not surprising as economies grow they become more complex. The more complex the economy, the more difficult it is to plan the allocation of resources effectively
Distribution of income: In practice centrally planned economies have strived for equality of income but there is considerable evidence to suggest that those in power have used the planning system to their own advantage
Risk: centrally planned economies would provide for their citizens according to their needs but it can be argued that removing risk also removes the incentives to work and create wealth
The environment: The problems with market economies is that individual producers base their production decisions on private rather than social costs thus creating negative externalities like pollution yet the environmental record of centrally planned economies in the past is arguably worse than of market economies
Human rights: centrally planned economies leave little room for individual freedom. The rights of citizens were taken away to a very great extent. Whether a pure command economy could operate within a political democracy is debatable
South Africa’s mixed economy
A mixed economy is a mixture of a market and a centrally planned economy
Characteristics of a mixed economy
Motivation: In the private sector of the mixed economy, consumers and producers are assumed to be motivated by self interest, the public sector however is assumed to be motivated by the necessity to satisfy the social needs of the community
Ownership: consumers, producers and organisations own most of the factors of production. The state nevertheless own a significant proportion. In Ada, the state owns the land and capital directly through Transnet, Telkom, the post office, Eskom ,the SABC and the rand water board.
Competition: In the private sector, competition is maintained and a great variety of goods and services are produced. In SA, rivalry in the private sector is maintained and promoted by the competitions act. The public sector provides protection, healthcare, education, and social welfare and economic services
The governments business enterprises are in general monopolies
State intervention: governments interfere in-order to realise social and welfare objective and to improve the functioning of markets. Redistribution is realised by means of a progressive taxation system. In recent years the South African gov has introduced a developmental state policy with implies greater government intervention in the economy
Advantages of a mixed economy
The private sector- private ownership, the profit motive and competition are the forces that ensure the production of a great variety of goods and service. Imports supplement domestic variety and choice. Exports create employment and contribute to economic growth
The public sector- protection, education, healthcare, social benefits, child allowances for people living with disabilities, unemployment and opportunities for the poor are provided. The public sector also includes economic issues such as handling of market failures, provision of adequate infrastructure and the creation of a solid economic framework
Optimum mix- the optimum mix would ensure an optimum standard of living for all citizens. Government allows sufficient room for the private sector to pursue its market objectives
The environment and human rights- mixed economies have better environment and human rights records than either centrally planned or market economies
Disadvantages of mixed economy
Creating poverty: Because the private sector has control over land and capital it may be able to exploit workers. By exploring imperfect markets the private sector can rob consumers and worsen the inequality of incomes and wealth therefore poverty grows
Crowding out the private sector: because the public sector has control over the legislative process, it may be tempted to use it to provide excessive social and welfare services. The scale of taxation and public sector enterprises become so extensive that private sector businesses are crowded out which leads to decreases in economic growth and employment creation
Efficiency in delivering socio-economic services
Merit goods and social services
social services or merit goods or public goods are provided by the government for the benefit of all or most of the population
Social Services
- In SA, social services are rendered by all spheres of government
- the figures are published annually and are part of the documentation presented together with the budget. Budget figures are nominal figures and therefore the percentage is based on current expenditures
- Consolidated government expenditure includes expenditure by 160 departments in all spheres of government and 181 entities that rely on the government for funding for their existence
- Expenditure includes that on housing, education, health services, social protection, environmental protection, and public order and safety
- the government expenditure shift in focus, as priorities and circumstances change
Education
- Education in SA is viewed as part of the training process to acquire skills and know-how and also develops basic skills such as literacy and numeracy that form the basis for the development of more specialised professional skill
- South Africa has a three tier education system from 2009. The department of basic education is responsible for grade R to grade 12 consisting of General Education and Training band and Further education and training band. The organisation and administrations these bands are delegated to provincial governments. The higher education and training band is organised and managed by the department of higher education and training. DHET has responsibility for colleges and universities as well as for training functions and institutions that previously fell under department of labour
- 95% South Africa’s GET level participation is high for a developing country. SA is ahead of most developing countries in terms of female participation which is about 50%. Something is wrong if 70% of a country’s learners do not perform at expected levels
- the system accommodated more than 12 million learners in school and less than 1 million in universities in 2010
-Training is concerned with the acquisition of specific occupation skills and is a post school experience. In SA such training happened in FET, nursing and agricultural colleges and apprenticeships and learnerships with SETAs and businesses. The training of apprentices is also knows as technical training - In 1994 some 5943 students passed the trade test. In 2009 the number was only 3392 after a small increase over the years immediately before then after the restructuring under the DHET progresses the numbers are expected in increase
The SETASs did not deliver the quantities or the qualities of skilled persons that was hoped for
At least three mechanisms exist through which education affects economic development and growth
- Education increases the human capital and hence labour productivity
- Education increases the innovative capacity of the economy, and the consequent new knowledge, technologies, products and processes promote economic growth
- Education facilitates the transfer of knowledge to implement new technologies devised by others which again promotes economic growth
Health
- people’s health is very important. Good health allows them to enjoy life and gives them energy to work and play. Healthy people have an incentive to invest in education because their longer life expectancy will earn them extended returns. Healthy people are usually also motivated and productive. These are essential driving forces for economic development and growth
- In SA healthcare is the services of dentist, doctors, nurses, and other registered medical services such as optometrist, physiotherapist and all sorts
- In SA, we have two health services systems such as a private and public system. People who are ill can visit private medical practitioners or a public clinic or hospital
The national Department of Health is responsible for both these systems - the department is responsible for the formulation, coordination and monitoring of health policies. Provincial health departments provide the actual services with regard to public healthcare
- the department is responsible for the legal framework in which it must operate. People who are members of medical aid schemes are not allowed to make use of the medical services provided by the public sector
The public healthcare system focuses on providing primary healthcare at clinics, community centres and mobile visiting points but secondary healthcare remains important because people will always be in need of hospital care. Academic and other state hospitals are maintained but they deteriorate because of lack of funds a shortage of medical personnel and outdated equipment
Altogether 42 million it of 50 million people are catered for by the public healthcare system. The quality in the public hospitals is totally unacceptable and though quality is generally regarded as being high in-the private sector most of the population lack access to decent services. The government is proposing a National Health Plan which will create a seamless system and will be financed by a National Health Insurance scheme
The new system will provide healthcare to everybody whether they are employed or not.
Social Protection
Why is it important?
In countries with high levels of poverty, social security allowances are very important because they focus on individuals and the Department of Social Development in SA also manages a poverty relief programme in cooperation with nine provinces and it also protects and promotes the rights of vulnerable groups such as children, elders women and people with disabilities
Housing and community amenities
housing for the poor is provided through the Department of Human Settlements, provincial housing departments, and municipalities. Since 1994, the government has provided nearly 3 million housing units for the poor families
amenities were widely installed and they promoted the quality of life of poor people and enhance their dignity
Public order and security
Physical protection includes the defense, police, criminal justice, and prison services. They are collective services. The quality and efficiency of these services make societies and individuals feel safe or unsafe, and secure or insecure. Only if people feel safe and feel that they can rely on the criminal justice system are they positive, creative, and industrious. This is important for the free market system to perform optimally
