Governments intervene in a mixed economic system.
A mixed economic system has a combination of the features of a
planned and a market economic system. Some firms are
privately owned (in the private sector) and some are government
owned (in the public sector).
Some prices are determined by the market forces of demand
and supply, and some are set by the government. In this type of
economic system, both consumers and the government
influence what is produced
A mixed economy seeks to gain the advantages of both a
market and a planned economy, whilst avoiding their
disadvantages.
Having some products produced by the private sector
may generate choice, increase efficiency and create incentives.
Benefits may also be gained as a result of state intervention.
• A government may limit firms’ ability to set their own prices by
imposing price controls.
• A government may set a maximum ceiling on the price in order
to enable the poor to afford basic necessities.
Figure 15.1 shows a maximum price being set
at Px below the equilibrium price of P.
Some people will now be able to purchase the
product at a lower price.
The problem is, however, that a shortage will
be created as at this lower price the quantity
demanded exceeds the quantity supplied.
To prevent the development of an illegal
market in the product, some method of its
allocation will have to be introduced. This
might be through queuing, rationing or even a
lottery
To encourage production of a product a
government may set a minimum price (Px). This
is a price floor, as it represents the lowest price
producers are allowed to charge.
To have an impact on a market, this will have to
be set above the equilibrium price as shown in
Figure 15.2.
This time the problem created is a surplus, with
the quantity supplied being greater than the
quantity demanded. To prevent the price being
driven down, the surplus will have to be bought
up by the government or some other official
body
1) Subsidies and indirect taxes
2) Competition policy
3) Environmental policies
4) Regulation
5) Nationalisation and privatisation
6) Direct provision
7) Unfairness
Subsidies and indirect taxes.
• A government may subsidise a number of the country’s firms. In contrast, all
firms are likely to be affected by taxes in some way. Government tax firms’
profits, which has an impact on the ability and willingness of firms to invest.
Indirect taxes raise firms’ costs of production, whilst income tax lowers
consumers’ disposable income, and as a result demand for firms’ products.
• The effect of a subsidy given to producers is influenced by the size of the
subsidy and the price elasticity of demand. As explained in Chapter 8, a subsidy
being an extra payment to producers, shift s the supply curve to the right. The
larger the subsidy, the more increase there is in supply.
The impact of a tax is again influenced by the size of the tax and the
price elasticity of demand. The higher the tax, the greater is its
impact.
If a government wants to raise revenue, it should tax products with
inelastic demand. This is because the quantity sold will not fall by
much. For example, a tax of $2 per product may be placed on a
product that initially has sales of 2000 a day. If the tax causes sales
to fall to 1800, the government will receive $3600 in revenue.
However, if the demand had been elastic and sales had fallen to 900,
the government tax revenue would have been only $1800.
In contrast, if the government’s aim is to discourage the consumption
of a product (in particular a demerit good) it will be more successful if
demand is elastic. This is one of the problems in using taxation to
discourage smoking, as demand for tobacco products is inelastic.
Competition Policy
- promote competitive pressures
- prevent firms from abusing their market power
- pervention of mergers
- removal barriers to entry and exit into markets
- regulation of monopolies
- predatory pricing
- limit pricing
Environmental policies
Firms can be affected by a range of policies designed to
improve environmental conditions.
- restrictions on pollutants
- limit permits to firms
Regulation
- Rules and laws
- Price controls
- Outlawing uncompetitive behaviour
- Limiting the amount of pollution emitted
Nationalisation and Privatisation
To benefit the public and to improve economic performance, a government
may set up an industry or nationalise a private sector industry. Industries
owned by the government are known as state-owned enterprises, public
corporations, and nationalised industries
Direct provision
Most governments produce at least some goods and services
that they think are essential.
- affordable housing
- education
- healthcare
Unfairness
Most governments produce at least some goods and services
that they think are essential.
A government is likely to try and ensure that everyone in the
country has access to basic necessities including housing,
education and healthcare. To achieve this, it can give financial
assistance to the poor and provide some essential products free
to consumers.
• Government intervention can help correct market failures such
as underconsumption of merit goods (e.g., education,
healthcare) and underproduction of public goods (e.g., street
lighting, national defense).
• Government intervention is essential for addressing market
failures, but it must be carefully designed and implemented.
Poorly planned intervention can lead to government failure,
causing inefficiency, wasted resources, and unintended
consequences. Balancing efficiency, equity, and political
realities is key to maximizing its effectiveness.