Define a mixed economic system explore the effects of imposing maximum and minimum prices in product and labour and markets explain how a range of policy measures including indirect taxation, subsidies, regulation, privatisation, nationalisation and direct provision may be used by the government to correct market failure discuss how eff ective government intervention is in overcoming the drawbacks of a market economic system compare expenditures by public and private sectors

1. MIXED ECONOMIC
SYSTEM
CHAPTER-15

2. Objectives
► Define a mixed economic system
► explore the effects of imposing maximum and minimum prices in product and labour and
markets
► explain how a range of policy measures including indirect taxation, subsidies, regulation,
► privatisation, nationalisation and direct provision may be used by the government to correct
market failure
► discuss how eff ective government intervention is in overcoming the drawbacks of a market
economic system
► compare expenditures by public and private sectors

3. 15.1 MIXED ECONOMY
Government intervenes in it. It’s an economy in which both the private and public
sectors play an important role. Some firms are privately owned (the private sector) while
some are government owned (the public sector).
Some prices are determined by the market forces of demand and supply, some determined by the government.
Bothconsumers and the government influence what is produced

4. ► Gov. takes into account all the costs and benefits.
► Gov. encourages the useful products to consumers (merit goods)
► Gov. discourage the harmful products (demerit goods)
► The gov. pays for products that cannot be charged for directly (public goods).
► Gov. prevents private sector firms from exploiting consumers.
► Gov. makes plans for the economy.
► Gov. help vulnerable people
Even In a mixed economic system, market failure may occur and government intervention can worsen the
situation. It’s not guaranteed that it will perform better than the other two types of systems.
Benefits of the gov. intervention in the mixed economic system:

5. 15.2 Maximum and minimum prices
● They can also be used in exchange rate systems.
● Government can set price controls to limit firms’ ability to set prices.

7. Maximum prices
★ A maximum price has to be set below the equilibrium
price.
★ Gov. sometimes make price controls to stop firms from
exploit consumers.
★ A government may set a maximum ceiling on the
price in order to enable the poor to afford basic
necessities

8. Minimum prices
Setting a minimum price (price floor) Px above the equilibrium price
of a product encourages its production, it represents the lowest price
producers are allowed to charge.
In Fig, the minimum floor caused a surplus. To prevent prices from
falling under the price floor, government or other official bodies will buy
up the surplus.
● A minimum price is offered to agricultural farmers, giving
them an incentive to supply more (S1) than the market
equilibrium.
● Can also be set on the labor price as a minimum wage.

9. Government measures to address
market failure
1. Subsidy: is extra money paid to producers by the gov.
Governments often provide subsidies to encourage the consumption of certain goods and
services.
For example, public transport might be subsidized to discourage people from using private
cars. The bus and railway firms receive a sum of money from the government which lowers
their production costs and causes the supply curve to shift from S1 (before subsidy) to S2
(after subsidy).
The effect of a subsidy given to producers is influenced by the size of the subsidy and the
price elasticity of demand.
The larger the subsidy, the more increase there is in supply

10. If demand is inelastic:
As demand is inelastic, producers have to
pass on most of the subsidy to encourage an
extension in demand. Price actually falls to P1
with consumers receiving most of the benefit
(PSXP 1 ) and the producers keeping the rest

11. One way to solve market failure is to place an
indirect tax on demerit goods, such as cigarettes,
with the aim of reducing demand for these products
the indirect tax imposed on a packet of cigarettes
causes the supply curve to shift from S1 to Stax.
As a result, price increases from P1 to P2 and the
quantity of cigarettes demanded decreases from
Q1 to Q2. The demand for cigarettes tends to be
price inelastic and therefore the percentage
change in quantity demanded is less than the
percentage increase in price. This means the tax has
to be very high to have any impact on reducing the
consumption of cigarettes
2.Taxes

12. Taxes
The advantages of imposing taxes:
1. It increases the price, so should reduce the quantity demanded.
2. It generates tax revenue for the government which can be used to fund important goods and
services.
Disadvantages of imposing taxes:
1. The demand for cigarettes, alcohol and petrol (gas for a car) tends to be price inelastic, which
means that the increase in price may have little impact on the consumption level of many people.
In the case of cigarettes, the nicotine in cigarettes makes smoking highly addictive and therefore
most smokers will pay the higher price, so consumption will change only slightly.
2.The indirect tax will be regressive, so will have a greater impact on low income earners than
high income earners.

13. Regulations:
Governments can also impose rules and regulations in an attempt to solve market failure.
For example a government may pass a law banning the sale of cigarettes to children. Laws
can also restrict where people can smoke. In many countries, smoking is banned in public
places such as shopping centres, bars, restaurants, airports, railways stations and even at the
beach

14. Examples :
laws regulating where people can drive, cycle and gamble
» setting price controls
» regulations imposed to make sure children are vaccinated against certain diseases
» laws making it illegal for people to eat or to talk on a mobile phone while driving
» motorcyclists being made to wear a helmet and car passengers having to wear seat
belts
» airport authorities regulating the number of night flights.
» timing for opening/closing of shops.
» control the routes that buses must follow
» outlawing uncompetitive behaviour
» limiting the amount of pollution emitted by a firm meet certain standards of the product.

15. The advantages of imposing rules and
regulations
► Consumption of the good or service may be reduced.
► Awareness of the negative impacts of demerit goods (such as drinking and
driving) can help to change the behaviour of people in the long term.
► Awareness of the positive impacts of consuming merit goods (such as
education) is raised.

16. Disadvantages of imposing rules and
regulations
» Restrictions cause underground (illegal) markets to provide the good or service, often at a
very high price.
» The government has no control over the quality of the goods produced in underground
markets, which in some cases can be dangerous for consumption — for example, illegally
distilled vodka or tainted baby milk powder.
» People break the rules — for example, under-age smokers and alcohol drinkers can bypass
the law by obtaining false ID cards.
» The fine or punishment for ignoring the rules and regulations must be enforced and set
sufficiently high to discourage consumption of the good or service

17. Competition policy
Competition policy: the gov. try to make competitive pressures and
prevent firms from abusing their market power by monopoly.
Examples :
► prevention of monopoly mergers.
► removal of barriers to entry and exit into markets.
► regulation of monopolies.
► prohibition of uncompetitive practices.

18. Environmental policies:
► The gov. imposes heavy fines on business which pollutes the
environment.
► Another policy is tradable permits. The government will make
permits to every business to pollute the environment to certain
limit. Every business can sell part of its permit if it doesn’t
pollute. This encourages businesses to pollute less.

19. Privatization and Nationalization
► Privatization : is selling a state- owned enterprise to the private sector (individuals –
private shareholders)
► state-owned enterprises (public corporations): industries owned by the government.
► Adv. Of privatization :
- Gov. will receive large amount of money from the selling.
- reduce gov. spending on public services.
- improves the efficiency of the business.
► Dis. Of privatization
-It may lead to monopoly which may lead to higher prices.
-Private sector doesn’t care about the public interest

20. Privatization and Nationalization
Nationalization :is the purchase of private sector business by the gov.
Adv. Of Nationalization:
- usually based their decision on the full costs and benefits.
- increase the national output.
- would not abuse its market power.
- Gov. usually makes planning.
- Strategic and basic industries such as electricity, transport…. Should be produced by the
gov. to make it cheap and affordable.
Dis. Of Nationalization:
- state-owned enterprises are difficult to manage and control
- They may become inefficient as they depend on the gov. ‘s spending so they don’t care
about quality or profit. This is not resource allocation.
- They will need to be subsidised if they are loss making.

21. Government's Role in Providing
Goods and Services
Essential Services: Governments provide essential goods (housing, education,
healthcare) to improve public welfare.
Merit Goods: Goods like education and healthcare are merit goods, which are
undervalued by consumers, leading to under-consumption and under-production
if left to the private sector.
Public Goods: Examples like street lighting and sea defenses, which are non-
rival and non-excludable, are provided by governments to avoid market failure.

22. Government Intervention for Fairness
Addressing Inequality: Governments use taxation and benefits to reduce income and wealth
inequality and ensure access to basic necessities for the poor.
Free Public Services: State-provided education and healthcare are funded by taxes to
ensure accessibility for everyone, regardless of income.
Social Stability: Reducing inequality helps prevent social unrest and increases productivity
by providing equal opportunities for all.

23. Effectiveness of Government
Intervention
Market Failure vs. Government Failure: Governments aim to reduce market failure but risk
inefficiency or political influence in decision-making.
Private vs. Public Sector: Debate over which sector leads to a more efficient allocation of
resources (e.g., building infrastructure like airports).
Cost-Benefit Analysis (CBA): Governments use CBA to evaluate social costs and benefits
before proceeding with large investments, ensuring decisions consider public welfare beyond
private profits.

24. Outline of long questions
c)A government could encourage consumption of a merit good by providing more information
to people about the benefits they can gain from consuming it. For example, a number of
governments run campaigns to overcome the information failure that exists about the benefits of
eating fruit and vegetables.
A government could also subsidise production of the merit good. This would lower its price,
which would increase people’s ability and probably their willingness to buy the product.
A third way is for the government to use regulation. It could make consumption compulsory.
For instance, a number of governments make it illegal for parents not to send their children to
school. This measure is sometimes combined with a subsidy that reduces the price to a low level or
even to zero price.

25. Outline of long questions
d) Consumers may benefit more from a market economic system than a mixed economic system.Consumers are
said to be sovereign in a market economic system. In theory, at least, they decide what is produced and signal their
choices to producers through the price mechanism. If they want more of a product, they will bid up its price, which
will encourage producers to supply more of it. Consumers may also benefit from low prices and high quality if
competition results in efficiency. To attract consumers, producers may have to keep prices low and to innovate.
Due to the risk of market failure, however, consumers may benefit more from a mixed economic
system. A government can finance the production of public goods. In a market economic system, consumers would
not be able to buy public goods. This is because private sector firms would have no incentive to produce them. They
cannot prevent those not willing to pay for them from enjoying them.
Consumers’ choices will be affected by measures to encourage the consumption of merit goods
and to discourage demerit goods. Some may dislike, for instance, taxes on high-fat foods and
may argue that they know better than the government what is good for them. In the long run,
However, these measures may change the pattern of consumer demand.

26. Continuation of d:
Competition is not guaranteed to be present in a market. Consumers may benefit from the government in a mixed economy
intervening to prevent private sector monopolies charging high prices. It may do this by regulating private sector monopolies
or nationalising them. State-owned enterprises may be more likely to base their production decisions on social rather than
private costs and benefits. If this is the case, consumers may benefit from, for instance, less pollution. A government may
also implement policies to promote factor mobility. If labour, in particular, becomes more geographically and occupationally
mobile, producers will be able to respond to changes in consumer demand to a greater extent.Poor consumers may benefit
more from a mixed economic system than a pure market economic system. This is because they lack purchasing power and
so will have little ability to influence and receive what is produced. In a mixed economic system, some essential products
may be heavily subsidised and they may receive benefits to increase their purchasing power.
Of course, there is the possibility that products produced by state-owned enterprises may be of a low quality if the lack of
competition and government funding reduces pressure on the enterprise to be efficient. The government may also fail to
estimate external costs and benefits accurately and so may over-tax or over-subsidise.
Which type of economic system will benefit consumers most will be influenced by whether market forces or market forces
combined with government intervention works more efficiently.