Unit 2 - Economic System

Question 1

Market economy 定义

Answer 1

Market economy an economic system that relies on the market forces of demand and supply (in the private sector) to allocate resources with minimal government intervention, such as the maintenance of law and order.

• E.g. Hong Kong and Singapore

Question 2

Planned / Command economy 定义

Answer 2

Planned economy is an economic system that relies on the government (in the public sector) allocating resources. It is often associated with a communist political system that strives for social equality.

• E.g. North Korea

Question 3

mixed economy 定义

Answer 3

Mixed economy is a combination of the planned and market economic system, with some resources being owned and controlled by private individuals and firms via price mechanism, while others are owned and controlled by the government in the public sector.

• The mixed economic system often achieves the best of both the planned and market economic systems
• E.g. Japan and the UK

Question 4

private sector定义

Answer 4

The private sector refers to economic activity of private individuals and firms. The private sector’s main aim is to earn profit for its owners.

Question 5

public sector定义

Answer 5

The public sector refers to economic activity directly involving the government, such as the provision of state education and healthcare services. The public sector’s main aim is to provide a service.

Question 6

pros and cons of market economy

Answer 6

Question 7

pros and cons of planned economy

Answer 7

★ Pros and cons of planned economy

✔ Maximise welfare —

Governments have more control over the economy, so they can prevent inequality and redistribute income fairly. They can also ensure the production of goods that people need and are beneficial to society

✔ Low unemployment —

The government can try to provide everyone with a job and a salary.

✔ Correct market failures

The market dominance of monopolies can be prevented by the government. The government will produce more merit goods, and less demerit goods to maximise social welfare.

✖ Poor decision-making —

A lack of information means that governments may make poor (and slow) decisions about what needs to be produced.

✖ Restricted choice —

Consumers have a limited choice in what they can consume, and firms will make what they’re told to make.

✖ Lack of risk-taking and efficiency

Government-owned firms have no incentive to increase efficiency, take risks or innovate, because they don’t need to make profit. Similarly, since there is no consumer sovereignty, workers are not motivated to work hard in order to consume more.

Question 8

pros and cons of mixed economy

Answer 8

✔ Mixed economy集成了 market + planned的好，

• 就是在全部东西上面都有优势
• For goods with no market failures，就用private sector那套，也就是market demand and supply, 所以一样有efficiency + freedom的好处
• For goods with market failures，就采用government intervention, such as tax, subsidies, regulation, direct provision, minimum price, maximum price
• For goods that are very essential to the poor，政府保障

✖Economic Inefficiency.

• Government intervention will bring incentive distortions. For example, if it is the imposition of a national minimum wage to protect workers, it will result in a higher unemployment instead.
• Tax and subsidies bring distortions to supply and demand.
• Regulations of monopoly power will discourage innovations.
• Direction provision of a good might be of inferior quality, as the public sector’s goal is to provide goods or services, not profit maximisation. The public sector lacks the incentive to improve products.

✖ Political opposition

There might be significant political opposition for the imposition of policies, such as a wealth tax for redistribution. For example, lobbying groups (政治游说) are hired to influence legislator, causing extra inefficiency.

✖ Red tapes

There might be red tapes (红线，繁文缛节的规定) and rent seeking behaviour (corruption) in a government’s daily running. A lack of accountability and transparency will damage business confidence, which will slow economic growth instead.

✖ Inaccuracy in practice

Government policies are not 100% accurate and effective. Even if the government only intervenes in goods with market failures, such as taxing a demerit good, the size of the tax is very hard to determine, since the government has to study the size of PED, PES and the size of demand and supply.