CHAPTER 11- The Mixed Economy and Market Failure IGCSE Economics

CHAPTER 11 THE MIXED ECONOMY & MARKET FAILURE

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Chapter 11 Learning Objectives

• Understand the difference between public sector and private sector in terms of definition, ownership, control, aims

• How THREE QUESTIONS are solved in the mixed economy

• Understand market failure and why government intervention may be needed

• Understand relative importance of public/private sectors in different economies

• Understand role of public/private in production of goods (including public)

Public Sector vs. Private Sector

• Public Sector - government organisations that provide goods and services in the economy

• Private Sector - provision of goods and services by businesses that are owned by individuals or group of individuals

Aims of the Private Sector

• Survival

• Profit Maximisation

• Growth

• Social Responsibility

Aims of the Public Sector

• Improve quality of services

• Minimising costs

• Allow for social costs and benefits

• Profit

Multiple Choice

How many types of economies are there?

• One

• Two

• Three

• More

Types of economy

1. Command / Planned Economy

2. Market / Free Enterprise Economy

3. Mixed Economy

Who answers THE THREE QUESTIONS to resolve scarcity (allocation of scarce resources between competing demands).

Multiple Choice

The PUBLIC SECTOR (government) makes all economic decisions.

• Command

• Mixed

• Market

Multiple Select

Ownership of the public sector include:

• Local authorities

• Central/Federal government departments

• Public corporations

• Public sector organisations

Multiple Select

Aims of the public sector include:

• Improving the quality of services

• Profit

• Minimising costs

• Allowing for social costs and social benefits (externalities)

Multiple Choice

Market forces of supply and demand decide what is provided for society in which type of economy?

• Command

• Mixed

• Market

Multiple Select

Ownership of the private sector include:

• Social trader

• Partnerships

• Companies

Multiple Select

Aims of the private sector include:

• Survival

• Profit maximisation

• Growth

• Allowing for social costs and social benefits (externalities)

• Social responsibility

Multiple Choice

Dividends are a profit distribution to owners (shareholders) of a company. This is a feature of which sector?

• Public sector

• Private sector

Multiple Choice

Assets are what the company owns. Liabilities are what the company _________.

• Owes

• Keeps

Multiple Choice

SBB is an example of a company in the...

• Public sector

• Private sector

• Third sector

Multiple Choice

The market has a reputation for being the most efficient way to allocate resources. A market failure is best described as...

• The idea that market forces of supply and demand always provide the maximum benefit for society

• The idea that market forces of supply and demand do not always provide the maximum benefit for society

• The concept that a decision made by one party can have negative effects on another party

• The concept that a decision made by one party can have positive effects on another party

What are the FIVE (5) types of MARKET FAILURE?

1. Externalities

2. Lack of Competition

3. Lack of Information

4. Factor Immobility

5. Missing Markets (Public Goods and Merit Goods)

MARKET FAILURE 1: EXTERNALITIES

Without government intervention, the market would have no incentive to fix negative externalities

Pass on costs of production to third parties without fines, regulations, pollution permits

MARKET FAILURE 2: LACK OF COMPETITION

Consumers may be exploited via higher prices when there is a lack of competition, especially for inelastic goods (necessities).

MARKET FAILURE 3: LACK OF INFORMATION

To be rational consumers must have access to all of the information. The government regulates businesses to make sure there is a free flow of information.

MARKET FAILURE 4: FACTOR IMMOBILITY

-Resources are scarce

-For the market to be efficient, resources must be mobile from one use to another

-Otherwise, wasteful

-Markets may not find other uses without government intervention

MARKET FAILURE 5: MISSING MARKETS

Must know the definitions of

1. Merit Goods

2. Public Goods

3. Free Rider Problem

- In a purely free market, if you can't pay, you don't get the good or service

- Some goods and services are good for society

Multiple Choice

It is both rivalrous and excludable. Rivalrous means consumption by one person reduces its availability for someone else. Excludable means it is possible to exclude people from using the good.

• Merit Goods

• Private Good

• Public Good

• Free Rider Problem

Multiple Choice

A product that is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy.

• Merit Goods

• Private Good

• Public Good

• Free Rider Problem

Multiple Choice

Which of the following is NOT an example of a public good?

• Fireworks display

• National Defense

• Public transportation

• Street lights

Multiple Choice

Occurs when people can enjoy the use of a good without paying for it; the problem of public goods; why public goods are paid using taxes

• Merit Goods

• Private Good

• Public Good

• Free Rider Problem

Multiple Choice

Products/services considered to be beneficial to society that would be under-provided or under-consumed in a purely free market economy (only those who can pay). Goods whose consumption create positive externalities.

• Merit Goods

• Private Good

• Public Good

• Free Rider Problem

Multiple Choice

Which of the following is least likely to be classed a merit good?

• Education

• Heath care

• Housing

• Petrol

How governments solve MARKET FAILURES?

1. REGULATIONS/FINES/POLLUTION PERMITS

- Businesses with externalities heavily regulated/fined/pollution permits

- Prevent businesses from merging & dominating (lack of competition)

-Force firms to provide info about products (lack of information)

2. SUBSIDIES/TAXATION    

- Taxes used to provide public and merit goods (missing markets)      

- Retraining workers (factor immobility)