Ch.2 The Allocation of Resources; Market Economic System, Market Failure and Mixed Economic System
A market economic system can be defined as a type of system where the prices of goods and services are determined by the market forces, that is, demand and supply.
Variety of goods and services.
Firms respond faster to changing spending patterns and consumer needs.
New products and efficient production methods due to the motive of earning more profit.
Minimum taxes, restrictions or regulations.
Some goods that are important or worthwhile may not be produced as the sole focus is on making profit. For example, private firms may not provide health care or education for those who cannot afford it.
Only produce and supply products to customers who can afford it.
Harmful goods will be produced if it makes profit for private entities.
Resources are used only if its profitable enough.
Firms may ignore the harms they may be causing to society and the environment.
There is minimum intervention of the government in the market economy. However, the government can intervene and influence the decisions of private firms through the following ways:
As a regulator, the government can regulate prices of certain products by setting maximum or minimum prices and banning the production of harmful goods such as guns, drugs etc.
As a consumer, the government has a high buying power. This means it can force certain firms to increase the production of certain goods or services.
As a producer, since the private firm’s sole purpose is to make profit, they may not provide essential public goods. As a producer the government steps in to provide essential goods such as healthcare, education and security to maintain law and order.
Market failure can be defined as a situation where the distribution of goods and services is inefficient. This is one the biggest drawbacks of a free market economy.
Causes and Consequences of Market Failures:
Inefficient allocation of resources.
Misallocation of resources,
Reduction in economic and social welfare.
Because free market system follows the forces of demand and supply, this means that inefficient allocation of resources may take place in multiple ways:
Public goods that benefit all consumers may not be provided. For example, police force and street lighting.
Few merit goods will be produced, such as health care and education.
Demerit goods will be produced in larger quantities if they help firms make profit. For example, alcohol and cigarettes.
Firms may exploit consumers and employees as there is no government intervention and the firm is able to control the market.
Goods with higher external costs will be provided. For example, people who smoke cigarettes cause negative impact on society as they also inhale the smoke, and this is an external cost on others.
Goods that have external benefits are provided less. For example, providing vaccination to people for the novel Corona virus so that it is not passed onto others.
External Cost can be defined as a cost that is not accumulated in the market price of a product or service. it is a cost borne by a third party. For example, radiation from a nuclear power plant or neighbors being disturbed because of a loud party.
Negative Externality is a cost for the society that results from business activities such as pollution from production of goods.
Positive Externality can be defined as the benefit that is achieved through a consumption of a product and service. For example, education is a positive externality as it helps people develop and learn new skills.
External benefit is the advantages enjoyed by a third party as a result of a product of service.
Private cost is the cost that is incurred by a firm to hire the factors of production in order to produce goods and services.
Social cost is the sum of the private costs incurred by a firm plus the external cost that this business activity has on the society.
**Private Cost + External Cost = Total Social Cost**Social Benefit is the sum of the total private benefit that a firm has through a business activity, that is, the production gains that it has plus the external benefit to the society as a whole as a result of the firm’s activity.
**Private Benefit + External Benefit = Total Social benefit**An economic use of resources would mean that the total social benefits exceed total social costs. This means that the ideal way of utilizing resources would grant more benefits to the society than the costs.
A mixed economic system can be defined as a type of system that is a mixture of both government and private enterprises. Resources are owned by the state as well as private firms.
Having the government involved can eliminate many of disadvantages associated with the market economic system, such as:
Worthwhile goods will be produced even if they do not make profit. For example, security forces, education etc.
Provide welfare goods to the less fortunate and those who cannot afford it.
Provide support to the ones who are unemployed.
Ban the production of goods that cause harm in the society, such as drugs or weapons.
Government will introduce policies and laws that can protect the environment and animals.
Correct market failures through usage of subsidies, taxes and regulations.
Spending or investing in goods/services and directly providing it to consumers. Example, schools and public healthcare.
Controlling prices through regulations so that private firms are unable to exploit consumers.
Usage of indirect taxes that would raise prices of harmful good such as cigarettes to reduc its consumption.
Providing subsidies to encourage the production of worthwhile goods such as education, medicines etc.
Government investment and decision making is a time-consuming process, and its benefits take even longer.
Price controls are used to discourage the production of harmful goods such a cigarettes or drugs However, this may increase smuggling and black markets.
Usage of taxes and subsidies can distort the natural equilibrium market price.
Usage of regulations to control prices may cause a rise in production costs. Fewer goods will be produced, and market prices will rise in the economy.
Public Sector do not have the incentive of making profit. This means that they may produce goods of poor quality.
Conflict of interest is a major cause of government intervention. Putting taxes on products that are harmful may cause an impact on all the consumers and firm will have to lose profits and revenue for it. This means there are some winners and some losers associated with state policies.
Some of state decisions may not be in the best interest of the economy or society. It may be influenced by a certain political agenda.
A market economic system can be defined as a type of system where the prices of goods and services are determined by the market forces, that is, demand and supply.
Variety of goods and services.
Firms respond faster to changing spending patterns and consumer needs.
New products and efficient production methods due to the motive of earning more profit.
Minimum taxes, restrictions or regulations.
Some goods that are important or worthwhile may not be produced as the sole focus is on making profit. For example, private firms may not provide health care or education for those who cannot afford it.
Only produce and supply products to customers who can afford it.
Harmful goods will be produced if it makes profit for private entities.
Resources are used only if its profitable enough.
Firms may ignore the harms they may be causing to society and the environment.
There is minimum intervention of the government in the market economy. However, the government can intervene and influence the decisions of private firms through the following ways:
As a regulator, the government can regulate prices of certain products by setting maximum or minimum prices and banning the production of harmful goods such as guns, drugs etc.
As a consumer, the government has a high buying power. This means it can force certain firms to increase the production of certain goods or services.
As a producer, since the private firm’s sole purpose is to make profit, they may not provide essential public goods. As a producer the government steps in to provide essential goods such as healthcare, education and security to maintain law and order.
Market failure can be defined as a situation where the distribution of goods and services is inefficient. This is one the biggest drawbacks of a free market economy.
Causes and Consequences of Market Failures:
Inefficient allocation of resources.
Misallocation of resources,
Reduction in economic and social welfare.
Because free market system follows the forces of demand and supply, this means that inefficient allocation of resources may take place in multiple ways:
Public goods that benefit all consumers may not be provided. For example, police force and street lighting.
Few merit goods will be produced, such as health care and education.
Demerit goods will be produced in larger quantities if they help firms make profit. For example, alcohol and cigarettes.
Firms may exploit consumers and employees as there is no government intervention and the firm is able to control the market.
Goods with higher external costs will be provided. For example, people who smoke cigarettes cause negative impact on society as they also inhale the smoke, and this is an external cost on others.
Goods that have external benefits are provided less. For example, providing vaccination to people for the novel Corona virus so that it is not passed onto others.
External Cost can be defined as a cost that is not accumulated in the market price of a product or service. it is a cost borne by a third party. For example, radiation from a nuclear power plant or neighbors being disturbed because of a loud party.
Negative Externality is a cost for the society that results from business activities such as pollution from production of goods.
Positive Externality can be defined as the benefit that is achieved through a consumption of a product and service. For example, education is a positive externality as it helps people develop and learn new skills.
External benefit is the advantages enjoyed by a third party as a result of a product of service.
Private cost is the cost that is incurred by a firm to hire the factors of production in order to produce goods and services.
Social cost is the sum of the private costs incurred by a firm plus the external cost that this business activity has on the society.
**Private Cost + External Cost = Total Social Cost**Social Benefit is the sum of the total private benefit that a firm has through a business activity, that is, the production gains that it has plus the external benefit to the society as a whole as a result of the firm’s activity.
**Private Benefit + External Benefit = Total Social benefit**An economic use of resources would mean that the total social benefits exceed total social costs. This means that the ideal way of utilizing resources would grant more benefits to the society than the costs.
A mixed economic system can be defined as a type of system that is a mixture of both government and private enterprises. Resources are owned by the state as well as private firms.
Having the government involved can eliminate many of disadvantages associated with the market economic system, such as:
Worthwhile goods will be produced even if they do not make profit. For example, security forces, education etc.
Provide welfare goods to the less fortunate and those who cannot afford it.
Provide support to the ones who are unemployed.
Ban the production of goods that cause harm in the society, such as drugs or weapons.
Government will introduce policies and laws that can protect the environment and animals.
Correct market failures through usage of subsidies, taxes and regulations.
Spending or investing in goods/services and directly providing it to consumers. Example, schools and public healthcare.
Controlling prices through regulations so that private firms are unable to exploit consumers.
Usage of indirect taxes that would raise prices of harmful good such as cigarettes to reduc its consumption.
Providing subsidies to encourage the production of worthwhile goods such as education, medicines etc.
Government investment and decision making is a time-consuming process, and its benefits take even longer.
Price controls are used to discourage the production of harmful goods such a cigarettes or drugs However, this may increase smuggling and black markets.
Usage of taxes and subsidies can distort the natural equilibrium market price.
Usage of regulations to control prices may cause a rise in production costs. Fewer goods will be produced, and market prices will rise in the economy.
Public Sector do not have the incentive of making profit. This means that they may produce goods of poor quality.
Conflict of interest is a major cause of government intervention. Putting taxes on products that are harmful may cause an impact on all the consumers and firm will have to lose profits and revenue for it. This means there are some winners and some losers associated with state policies.
Some of state decisions may not be in the best interest of the economy or society. It may be influenced by a certain political agenda.