Mixed Economic System | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)
2.11.1 Definition of the Mixed Economic System
- A mixed economic system combines elements of both the market economy and the planned economy.
- It includes both:
- Private sector decision-making via the price mechanism, and
- Government intervention to correct market failure and promote equity and efficiency.
Key Characteristics:
- Coexistence of private and public sectors
- Government involvement through:
- Regulation
- Taxation
- Subsidies
- Direct provision of essential services
- Prices mostly determined by market, but sometimes fixed or influenced by the state.
- Examples of mixed economies: UK, France, Pakistan, South Africa.
2.11.2 Government Intervention to Address Market Failure
1. Maximum and Minimum Prices
A. Maximum Price (Price Ceiling)
- Definition: A legally set price below the equilibrium price.
- Purpose: To make essential goods more affordable (e.g., rent control, bread, medicines).
- Result: Creates a shortage (demand > supply).
Diagram:
- Demand and supply curve.
- Max price line below equilibrium.
- Show excess demand (shortage).
Implications:
- May lead to black markets, queues, and rationing.
- May require government subsidy or direct provision to meet excess demand.
B. Minimum Price (Price Floor)
- Definition: A legally set price above the equilibrium price.
- Purpose: To protect producers (e.g., agricultural support, minimum wage).
- Result: Creates a surplus (supply > demand).
Diagram:
- Minimum price line above equilibrium.
- Surplus indicated (excess supply).
Implications:
- Government may buy surplus, store it, or destroy it.
- Can distort resource allocation if set too high.
2. Indirect Taxation
- Definition: A tax levied on goods/services (e.g., sales tax, VAT, excise duties).
- Purpose:
- Raise revenue.
- Reduce consumption of demerit goods (e.g., tobacco, fuel).
- Internalize negative externalities.
Diagram:
- Supply curve shifts left/upwards.
- New higher price for consumers, lower quantity demanded.
- Government collects tax revenue (shaded area between old and new supply).
Implications:
- Reduces over-consumption.
- Regressive impact if poor spend larger proportion of income on taxed goods.
3. Subsidies
- Definition: A payment by government to producers or consumers.
- Purpose:
- Encourage production/consumption of merit goods (e.g., education, vaccines).
- Lower costs for producers.
Diagram:
- Supply curve shifts right/downward.
- Price falls, quantity increases.
- Subsidy shown as vertical distance between supply curves.
Implications:
- Can improve allocative efficiency.
- Costly to government (opportunity cost).
- May cause inefficiency or overdependence if overused.
4. Other Government Microeconomic Measures
A. Regulation
- Definition: Government rules/laws to restrict certain behaviors.
- Examples:
- Pollution caps
- Smoking bans
- Safety requirements
- Purpose:
- Correct externalities, ensure fairness and safety.
B. Privatisation
- Definition: Transfer of government-owned assets or services to the private sector.
- Advantages:
- Increases competition and efficiency.
- Reduces burden on government budget.
- Risks:
- Natural monopolies may exploit consumers.
- May reduce service access for vulnerable groups.
C. Nationalisation
- Definition: Government takes over ownership of private businesses.
- Purpose:
- Control essential services (e.g., water, rail).
- Prevent exploitation and ensure equity.
- Issues:
- May reduce efficiency.
- Prone to political interference.
D. Direct Provision of Goods and Services
- Definition: Government directly produces goods/services (e.g., schools, hospitals, defense).
- Justification:
- Public and merit goods are often underprovided in the free market.
- Benefit:
- Improves access and fairness.
Effectiveness of Government Intervention
| Type of Intervention | Strengths | Weaknesses |
|---|---|---|
| Maximum Prices | Protects consumers | Creates shortages, black markets |
| Minimum Prices | Supports producers | Creates surpluses, inefficiencies |
| Indirect Taxes | Reduces harmful consumption | Regressive, may burden poor |
| Subsidies | Boosts merit goods | Costly, misused by producers |
| Regulation | Protects society | May stifle innovation |
| Privatisation | Efficiency and profit motive | May reduce service quality |
| Nationalisation | Ensures fairness | Less efficient |
| Direct Provision | Ensures basic needs | High cost, government inefficiency |
Exam Tip
- Use clear, labelled diagrams for:
- Maximum price (shortage),
- Minimum price (surplus),
- Indirect tax (shift in supply),
- Subsidy (supply shift).
- Explain real-world examples: e.g.,
- Rent control in New York,
- Minimum wage in UK,
- Carbon taxes in EU,
- Free vaccines by public health departments.
- Evaluate: Explain both benefits and limitations of each policy.
