1.1.5 The mixed economy

economy

system that attemps to solve the basic economic problem

private sector

provision of goods and services by businesses that are owned by individuals or groups of individuals

public sector

government organisations that provide goods and services in the economy

shareholders

people or organisations that own shares in a company

dividend

part of a company’s profit that is divided among th epeople with shares in the company

assets

things or resources belonging to an individual or a business that has value or the power to earn money

liabilities

amount of debt that is owed or must be paid

market failure

where markets lead to inefficiency

mixed economy

economy where goods and services are provided by both the private and public sectors

merit goods

goods that are underprovided by the private sector

public goods

goods that are not likely to be provided by the private sector

free rider

individuals who enjoy the benefit of a good but allow others to pay for it

private sector ownership and control

owned and controlled by individuals or groups of individuals

private sector ownership and control size

sole traders( business owned and controlled by one person)/ partnerships( business owned and controlled by two or more people working together)/ companies( businesses owned by shareholders, elected board of directors)

private sector aims

survival/ profit maximisation/ growth/ social responsibility

private sector survival

important when trading conditions are difficult

private sector profit maximisation

economic theory assumes firms will aim to maximise profits, owners may not want to take on the extra responsibility of growth and is content to make a profit; companies pay shareholders a share of the profit through a dividend and managers who run large firms make enough profit to satisfy shareholders

private sector growth

aim to grow as bigger businesses enjoy a number of advantages( e.g. economies of scale, leading to higher profits in the future), benefitting stakeholders; profit is used to finance growth( shareholders may not like this as it may lower dividends

private sector social responsibility

aim to please a wider range of stakeholders

public sector ownership and control

owned and controlled by local or central government

public sector ownership and control examples

central government departments/ public corporations or state owned enterprises/ local authority services

public sector aims

improving quality of services/ minimising costs/ social costs and benefits/ profits

public sector improving quality of services

performance indicators used to monitor quality

public sector minimising costs

government resources are scarce, hence watse must be minimised

public sector social costs and benefits

placed to take into account the needs of a wide range of stakeholders, as aim is not profit

types of economies

free enteprise economy/ command planned economy

free enteprise economy

relies least on the public sector for the provision of goods and services( provided mostly by private businesses), supply and demand determine the allocation of resources; public sector provides a legal system, monetary system, key state services, and ensures competition exists between businesses

free enterprise examples

Singapore, Australia, USA

command/ planned economy

relies entirely on the public sector to choose, produce, and distribute goods, all resources belong to the government; state is responsible for planning, organising, and coordinating the production process( goods distributed from state owned shops sold to consumers at prices set by the state)

command/ planned economy

Cuba, Myanmar, North Korea

private sector goods

food, clothes, leisure, entertainment, and household services are more likely to be provided by the public sector

public sector goods

education, street lighting, roads, and protection are more likely to be provided by the public sector( public sector tends to provide goods that the private sector may fail to provide in sufficient quntities, caused by market failure)

market failure causes

externalities/ lack of competition/ missing markets/ lack of information/ factor immobility

market failure externalities

firms may not always take into account all costs of production, such as damages done to people or things outside the business( e.g. health)

market failure lack of competition

markets may fail if there is no competition and becomes dominated by one or a small number of firms, which may exploit consumers by charging higher prices and limiting choice

market failure missing markets

public goods are not provided by the private sector; merit goods such as education and healthcare are underprovided by the private sector( due to the price, many people would not be able to afford them

market failure lack of information

efficient markets require free flow of information to all parties; a lack of information may result in the wrong goods being purchased, produced, or wrong prices being paid

market failure factor immobility

factors of production need to be mobile for markets tow ork efficiently; labour and capital must be able to move freely from one use to another

government intervention fines

businesses imposing externalities may be heavy regulated or fined( e.g. for polluting the atmosphere)

government intervention legislation

prevent businesses from dominating markets( e.g. investigation of whether a merger is in the interests of consumers and block them if they are not); force firms to provide more information about products to overcome the problem of poor information

government invervention state money

used to provide public and merit goods

government intervention retraining

make factors more mobile through the retraining of workers

characteristics of public goods

non excludability/ non rivalry

public good characteristic non excludability

once a public good is provided in the market, any individual consumer cannot be prevented or excluded from its consumption, nor can the individual consumer refuse consumption of the good

non excludability example

protection given by a police service( public good), individuals cannot be excluded from the protection given in a community by the police force, nor can an individual living in the community refuse to benefit from the protection

public good characteristic non rivalry

consumption of a public good by one individual cannot reduce the amount available to others

non rivalry example

someone benefitting from the protection provided by the police does not prevent others benefitting from the same protection

free rider problem

governments have to provide public goods due to market failure; if the private sector were to provide goods, there would be a free rider problem as it is impossible to exclude the consumption of a public good by an individual consumer, hence there is little reason to pay