Economics: the mixed economy, privatisation, and externalities

what is an economy?

it is a system that attempts to solve the basic economic problem

what do decision makers in an economy have to decide?

they have to decide what to produce, how to produce, and for whom to produce

describe the private sector

• individuals or groups of individuals are free to set up businesses and supply goods and services

• they take form in sole traders, partnerships, and companies

• they aim for: survival since many starting firms find it difficult to raise finance

• profit maximisation because most business owners want to make profit

• growth, and social responsibility

describe the public sector

• they take form in central government departments, public corporations, local authorities

• they aim to improve service quality, minimise cost

what are the types of economies?

• a market economy: the rely mostly on private businesses to provide goods and services. the public sector is limited to providing a legal system

• a planned economy: relies entirely on the public sector and all resources belong to the government

• a mixed economy: they rely on both the public and private sector

what to produce?

• the market system ensures that businesses produce consumer goods that people want

• the public sector tends to provide goods that the private sector might fail to provide such as roads and street lights

• this is caused by market failure

how to produce?

• in the private sector, to meet consumers’ needs, firms will want to maximise quality and minimise costs

• some public sector goods are produced by the private sector

• governments may pay private sector businesses to carry out work of construction and maintenance for public goods

for whom to produce?

• the goods produced in the private sector are sold to anyone who can afford them

• while public sector goods are provided free to everyone and paid from taxes