15 Mixed Economy

15.
Mixed Economic
System
IGCSE ECONOMICS (0455)
15.1 A mixed economy
15.2 Maximum and minimum prices

About
15.3 Government measures to
address market failure
15.1 A mixed economy
Mixed economic system: an economy in which both the private and public
sectors play an important role.
● Combines the features of a planned & a market economic system.

● Some firms are privately owned (in the private sector) & some are
government owned (in the public sector).
● Resource allocation is determined by both price mechanism & the
government (both consumers & the government influence what is
produced).
15.2 Maximum & minimum prices
Maximum price Minimum price
A maximum ceiling on the price should be set A minimum price floor will have to be set
below the equilibrium price to enable the poor above the equilibrium price to encourage
afford basic necessities. production of a product.
Ways to prevent the development of an illegal E.g. minimum wage - minimum price set on
market due to shortage problem: the price of labour.
● Queuing
● Rationing: a limit on the amount that Ways to prevent the price being driven down
can be consumed. due to surplus:
● Lottery: The drawing of tickets to decide ● Surplus must be bought by the
who will get the products. government / some other official body.
The effect of setting a maximum / minimum price
= Price Floor
Excess demand = Excess supply = surplus

shortage
A. Subsidies and indirect taxes
B. Competition policy
15.3 Government C. Environmental policy
D. Regulation
measures to E. Nationalisation and
privatisation
address market F. Direct provision
failure G. Unfairness
H. Effectiveness of government
intervention
● The effect of subsidy / tax is influenced
by the size of subsidy / tax and PED.
● A subsidy / tax on a product with
inelastic demand would have greater
effect on price than the quantity sold,
A.Subsidies & while in the case of a product with

elastic demand, it is the other way
round.
Indirect taxes ● If government wants to raise revenue, it
should tax products with inelastic
demand.
● If the government aims to discourage
consumption of a product, it will be
successful if demand is elastic.
The effect of a subsidy in the case of inelastic vs elastic demand
The effect of an indirect tax in the case of inelastic vs elastic demand
● Purpose: to promote competitive pressures &
prevent firms from abusing their market power.
● Ways that government might be able to do:

○ Prevention of mergers that will not be in the
interest of consumers
B. Competition ○ Removal of barriers to entry & exit the

markets
○ Regulation of monopolies
Policy ○ Prohibition of uncompetitive practices,

■ Predatory pricing - a firm charges a
price below the cost to drive a rival
firms out of the market.
■ Limit pricing - setting the price low
enough to discourage the entry of
new firms into the market.
● Purpose: to improve environmental conditions.
● Ways that government might be able to do:

○ Place restrictions on the amount of
pollutants emitted by firms into the air, sea,
rivers.
C. Environmental ○ Fine any firms which exceed these limits

○ Tradable permits - a government issues
permits to firms, allowing them to pollute
Policies up to a certain limit & to sell part of their

allocated limit if they pollute less - It will
reduce the costs of the cleanest firms,
while raising the cost of the worst polluting
firms, so the cleanest firms should capture
a higher market share & pollution should
fall.
● Definition: rules and laws which place restrictions on
the activities of firms.
● Examples:
○ A law banning the sale of cigarettes to children.
○ Timing for opening/closing of shops.
○ Control the routes that buses must follow.
○ Require firms to ensure that the products
produced meet certain standards.
D. Regulation
○ Require firms to allow workers a specified
number of regular holidays.
● Problems imposing regulations:

○ If regulations do not directly compensate those
who suffer as a result of market failure
○ If regulations is too restrictive, so reducing
market flexibility & creating barriers to entry
○ If most people do not agree, too much time &
money needed to prosecute the offenders.
● Nationalisation: moving the ownership and control of
an industry from the private sector to the government.
● Public corporation (State Owned Enterprise = SOE):

business organisation owned by the government which
is designed to act in the public interest.
● Advantages (+):
○ Base their decisions on the full costs & benefits
involved
E1. Nationalisation ○ Can be directly encouraged to increase output

to boost the country’s output
○ If there is only 1 firm in the industry, SOE will not
abuse its market power
○ Planning & coordination should be easier, e.g.
ensure train timetables are coordinated
○ Important to ensure basic industries (e.g.
electricity, transport) can survive, charge low
prices, produce good quality
● Nationalisation: moving the ownership and control of
an industry from the private sector to the government.
● Public corporation (State Owned Enterprise = SOE):

business organisation owned by the government which
is designed to act in the public interest.
● Disadvantages (-):
○ Can be difficult to manage and control due to its
large size - the time spent on meetings &
E1. Nationalisation communicating with staff slows down the

decision making
○ May become inefficient, produce low quality
products & charge high price due to lack of
competition & knowledge that they cannot go
bankrupt
○ Need to be subsidized if they are loss making.
Tax revenue used to support them has
opportunity cost, e.g. for training more
teachers/nurses.
E2. Privatisation
= The transfer of the ownership of assets from the public sector to the private sector
Advantages (+): Disadvantages (-):
● Government gets revenue from the sale of ● It may create a monopolist, which is not
state-owned assets. always a positive outcome for customers.
● Private sector businesses have the ● It may still require government regulation
incentive to improve efficiency as they to protect the public interest.
need to remain competitive. ● It can reduce government control of the
● Reduce cost to taxpayers - no need to economy.
finance the operations of the business.
● Reduce government debt - gov. no longer
need to maintain the operation of SOE,
earns revenue from the sale of asset,
private firms pay corporate taxes.
● Most governments produce at least some goods &
services that they think are essential, e.g. affordable
housing to rent.
● To stimulate the consumption of merit goods,
F. Direct Provision governments also pay private sector firms to produce

them, provide information about their benefits, and in
some cases make the consumption compulsory.
● Income distribution can be very uneven if it’s
determined by market forces. Private sector firms will
not want to produce products needed by the poor.
● A big difference in income and wealth of the rich and
poor is unfair, can be socially divisive & can result in
some workers being less productive.
○ Poor people may be less healthy, less well
educated, and consequently less productive.
G. Unfairness ● State education & health care are provided for free in
some countries not only because they are merit goods,
but also to make them accessible to the poor.
● Elderly and the sick may be unable to earn incomes.
● There may be social unrest if there is considerable
income inequality.
● Taxation may be used to reduce income & wealth
inequality.
● Government may fail to reduce market failure, e.g.:
○ High taxes on firms’ profits can reduce
entrepreneurs’ willingness & ability to invest.
○ High taxes on income & unemployment benefits
may discourage some people from working.
H. Effectiveness of ○ Government may decide not to raise tax on

petrol despite concern on the environment
because it may lose the votes (political factor).
Government ● Cost Benefit Analysis (CBA): a method of assessing

investment projects which takes into account, social
Intervention costs and benefits.
● Multinational companies (MNCs): companies which

produce in more than one country.
End of Section 2
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15.

15.2 Maximum and minimum prices

● Combines the features of a planned & a market economic system.

Excess demand = Excess supply = surplus

A.Subsidies & while in the case of a product with

● Ways that government might be able to do:

B. Competition ○ Removal of barriers to entry & exit the

Policy ○ Prohibition of uncompetitive practices,

● Ways that government might be able to do:

C. Environmental ○ Fine any firms which exceed these limits

Policies up to a certain limit & to sell part of their

● Problems imposing regulations:

● Public corporation (State Owned Enterprise = SOE):

E1. Nationalisation ○ Can be directly encouraged to increase output

● Public corporation (State Owned Enterprise = SOE):

E1. Nationalisation communicating with staff slows down the

Advantages (+): Disadvantages (-):

F. Direct Provision governments also pay private sector firms to produce

H. Effectiveness of ○ Government may decide not to raise tax on

Government ● Cost Benefit Analysis (CBA): a method of assessing

● Multinational companies (MNCs): companies which

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