1.1.11-13 mixed economy, privatization, externalities

private sector

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

• aims include: profit driven (unless they have irrational goals e.g social good), growth, competitive

public sector

• government organizations that provide goods and services in the economy

• aims include: minimizing costs (as gov. resources are scarce), serve the needs of society (high quality, low cost services), allow for social benefits

free market economy

• relies the least on the public sector to provide good + services

command economy

• relies entirely on the public sector to choose, produce and distribute goods

mixed economy

• relies on both the private and public sector to provide goods and services

market failure

when the free market is left to their own devices, leading to inefficiency e.g inefficient allocation of resources, creates social costs

externalities

positive and negative effects of economic activity onto a third party e.g pollution, eyesores

merit goods

goods and services which have positive externalities and would be underprovided by the private sector, e.g vaccines, healthcare, roads

public goods

• goods and services which are not likely to be provided by private sector

• non-rivalrous, non-excludable

• e.g education, street lighting, police

demerit goods

goods and services that have negative externalities and are often overconsumed by private sector e.g alcohol, smoking

privatization

• act of selling a company controlled by the government to private investors

• improve efficiency, reduce fiscal burden, expand consumer choice, increase innovation, increase quality of goods

• loss of public control, potential monopolistic behavior, cost cutting/efficiency gains makes workers redundant = jobs lost

taxation

• reduce externalities due to consuming demerit goods e.g taxing cigarettes to increase cost, therefore less ppl buy them (cons: cigars are highly addictive, inelastic demand)

• reduce externalities due to production e.g pollution permits to deincentivise firms from producing pollution as it increases cost of production.

subsidies

• the government may give out subsidies + financial rewards to incentivize economic activity that increases positive externalities

• e.g gov subsidizing solar energy providers = less negative externalities aka pollution

fines

• fines to reduce external costs

• e.g fines imposed on firms who damage the environment such as littering