1.1.5 The mixed economy

a) Definition of mixed economy - A mixed economy is an economic system where resources are allocated through a combination of the price mechanism and government intervention.

b) Definition of public and private sector.

Public Sector - The part of the economy owned and controlled by the government

Private Sector - The part of the economy owned and controlled by individuals or businesses, focusing on producing goods and services for profit.

c) Difference between public and private sectors in terms of ownership, control and aims.

Public Sector

Ownership - The public sector is owned by the government.

Control - Public sector decisions are made by government bodies.

Aims - The public sector aims to provide essential goods and services for social welfare.

Public Sector

Ownership - The private sector is owned by individuals and businesses.

Control - Private sector decisions are made by owners or managers.

Aims - The private sector aims to maximise profits.

d) How the problems of what to produce, how to produce and for whom to produce are solved in the mixed economy.

  1. What to produce? - The price mechanism decides for private goods, while the government determines essential goods and services.

  2. How to produce? - Businesses focus on efficiency while the government enforces regulations to focus on welfare and wellbeing.

  3. For whom to produce? - The market allocates resources based on buying power (the ability of a person, group, or company to buy things, or the amount of money they have available to spend). The government provides all with access to basic needs through subsidies or welfare programs.

e) Concept of market failure – linked to inefficient allocation of resources.

Definition: Market failure occurs when the price mechanism fails to efficiently allocate resources.

  • This may lead to the overproduction of harmful goods or the underproduction of public goods.

f) Why governments might need to intervene because of market failure.

Governments intervene in markets to correct market failure, which occurs when resources are inefficiently allocated. Some reasons governments intervene include:

  • To provide public goods

  • To reduce income equality

  • To correct externalities

  • To regulate monopolies

  • To address imperfect information

g) Definition of public goods – non-excludability, non-rivalry and how this causes the free rider problem.

Definition: Public goods are goods that are non-excludable and non-rival.

Non-excludable - A good is non-excludable if it is not possible to prevent people from using it, even if they have not paid for it.

Non-rival - A good is non-rivalrous if one person’s use of it does not reduce the availability for others.

This causes the free rider problem in two ways. First, as public goods are non-excludable, people can use them without paying, making it difficult to charge users directly. Second, with non-rivalry, where one person’s use does not affect others, individuals may choose to benefit without contributing. This leads to the free rider problem, where goods are underprovided by the private sector since firms cannot profit from their production.

h) The role of the public sector and private sectors in the production of goods and services.

Public Sector

  • Focuses on producing public goods and merit goods to benefit society.

  • Aims to ensure fair access, address market failures, and provide goods that are not profitable for the private sector.

Private Sector

  • Produces consumer goods and services for profit.

  • Driven by the price mechanism, focusing on efficiency and meeting consumer demand.

i) The relative importance of public sector and private sector in different economies.

Planned Economies

  • The public sector is dominant, controlling most resources and decision-making.

  • The government is responsible for producing nearly all goods and services.

  • There is little to no private sector activity

Free Market Economies

  • The private sector is the most dominant, with minimal government intervention.

  • Nearly all goods and services are produced by private businesses.

  • The public sector plays a small role, which is often limited to defence or infrastructure.

Mixed Economies

  • Both the public and private sectors play significant roles.

  • The private sector focuses on producing consumer goods and services for profit.

  • The public sector provides public goods and services.

j) Definition of privatisation - Privatisation is the process of transferring ownership and control of a business or service from the public sector (government) to the private sector (individuals or businesses).

k) Effects of privatisation on:

  • Consumers - Consumers may benefit from improved quality and lower prices due to increased competition in the market. However, if privatised businesses prioritise profit over affordability and accessibility, prices may also increase.

  • Workers - Employees may lose their jobs as a result of privatised businesses aiming to reduce expenses and increase efficiency. However, workers may experience better working conditions or higher wages if these businesses focus on boosting productivity and employee satisfaction.

  • Businesses - Privatised businesses have more freedom to make decisions without government intervention, which may result in increased innovation and output. However, there may be greater competition in the market, which could  increase risk and expectations.

  • Government - Selling state-owned businesses allows the government to lower its financial burden which could potentially result in an increased revenue. These funds can then be used for services such as healthcare and education. However, through privitisation, the gobvernment loses control over these businesses which could make regulation enforcement and monitoring more difficult.