<2.11 MIXED ECONOMIC SYSTEM> 

• "A MIXED ECONOMIC SYSTEM" is one that exhibits a COMBINATION of the features of a PLANNED and a MARKET economic system. 

  • • • • • • "WHO OWNS THE PRODUCTIVE RESOURCES?" Some firms are PRIVATEY OWNED (in the 'PRIVATE SECTOR') and some are GOVERNMENT OWNED (in the PUBLIC SECTOR). 

            • "HOW ARE PRICES SET?" PRICES are determined by the MARKET FORCES of demand and supply, and some are SET BY THE GOVERNMENT. 

            • "WHO DECIDES WHAT TO PRODUCE?" In this type of economic system, both CONSUMERS and the GOVERNMENT decide what is produced.

• In the last unit we were introduced to MARKET FAILURE, that resulted in too much or too little production and consumption, or in some cases no output whatsoever, hence the government will attempt to intervene in many ways to ensure these failures are curtailed or even eliminated, but how will they do it

• TO ENCOURAGE THE CONSUMPTION/PRODUCTION of MERIT GOODS, which are UNDERPROVIDED in the free market, such as VACCINATIONS, EDUCATION and HEALTHCARE by either LOWERING THE COSTS OF PRODUCTION for producers using SUBSIDIES which will RAISE the PRICE received by producers and LOWER the PRICES paid by consumers, and thus INCREASE BOTH the QUANTITY DEMANDED and SUPPLIED or by INCREASING DEMAND through the USE OF POSITIVE ADVERTISING TO RAISE AWARENESS of the POSITIVE BENEFITS of this activity.

• Explain using a diagram how a government can correct a market failure in the form of underproduction using a subsidy and positive advertising.

• TO DISCOURAGE THE CONSUMPTION/PRODUCTION of DEMERIT GOODS, which are OVERPROVIDED in the free market, such as CIGARETTES, POLLUTION and ALCOHOL by RAISING THE COSTS OF PRODUCTION for producers using TAXES which will LOWER the AFTER TAX PRICE RECEIVED by producers and RAISE the PRICES for consumers and thus DECREASE BOTH THE QUANTITY DEMANDED and SUPPLIED or by DECREASING DEMAND through the USE OF NEGATIVE ADVERTISING TO RAISE AWARENESS of the NEGATIVE COSTS of this activity.

• Explain using a diagram how a government can correct a market failure in the form of overproduction using a tax and negative advertising.

• Government can finance the production of products that ARE BENEFICIAL TO SOCIETY, but CANNOT BE CHARGED DIRECTLY TO CUSTOMERS, such as National Defense by USING TAX CONTRIBUTIONS FROM THE PUBLIC. E.g. Public goods such as national defense.

• Government can seek to prevent private sector firms from exploiting consumers by charging high prices.

• Government can help vulnerable groups, ensuring that they have access to basic necessities. It can also create a more even distribution of income, by taxing the rich at a high rate.

• INDIRECT (UNIT) TAXES, refers to a tax per unit that has already been imposed on the producers BEFORE the good or service is actually bought by the consumer, meaning it is considered an 'INCREASE IN THE COSTS OF PRODUCTION' and results in a LEFTWARD SHIFT IN THE SUPPLY CURVE and usually results in a REDUCTION IN PRODUCTION and CONSUMPTION levels.

• "Why is it called indirect?" As the costs of production have risen the producer will try to 'pass off' this extra cost in the form of a higher price to consumers as such we say that when the customer buys the product at this higher price they are INDIRECTLY contributing to this extra tax. 

• Q. Why would the government want to cause a LEFTWARD SHIFT IN THE SUPPLY CURVE and REDUCE THE PRODUCTION and CONSUMPTION of a good or service? The answer is to CORRECT A MARKET FAILURE in the form of OVERPRODUCTION. or simply to COLLECT TAX REVENUE.

• CIGARETTE TAX

• ALCOHOL TAX

• SUGAR TAX

• CARBON TAX

• ...

In order to reduce the quantity transacted the government needs to do two things: 

• 1) RAISE the price to the consumer, so Qd FALLS.

  • • • So the government will impose an extra cost of production on to the product which will raise its price to the consumer resulting in a fall in quantity demanded. (Law of demand)

• 2) LOWER the price received by the producer, so Qs FALLS.

  • • • After receiving the higher price the producer must give the tax amount to the government reducing the price they finally receive (after tax) resulting in a fall in quantity supplied (Law of supply)

• Indirect taxes are VERY EFFECTIVE, as they almost ALWAYS RESULT IN A FALL IN TOTAL REVENUE (Unless the demand is perfectly inelastic), which incentivises producers to reduce output closer to the socially optimal level.

• Sketch the only scenario in which a tax has no impact on total revenue

• SUBSIDIES, refers to a payment per unit that has already been given to the producers BEFORE the good or service is actually bought by the consumer, meaning it is considered an 'DECREASE IN THE COSTS OF PRODUCTION' and results in a RIGHTTWARD SHIFT IN THE SUPPLY CURVE and usually results in an EXPANSION IN PRODUCTION and CONSUMPTION levels.

• Q. Why would the government want to cause a RIGHTWARD SHIFT IN THE SUPPLY CURVE and EXPAND THE PRODUCTION and CONSUMPTION of a good or service? The answer is to CORRECT A MARKET FAILURE in the form of UNDERPRODUCTION.

• In order to increase the quantity transacted the government needs to do two things: 

• 1) LOWER the price to the consumer, so Qd RISES:

  • • • So the government will give extra income to the producer, effectively reducing the costs of production on to the product which will LOWER its price to the consumer resulting in a RISE in quantity demanded. (Law of demand).

• 2) RAISE the price received by the producer, so Qs RISES:

  • • • After receiving the subsidy the price the producer finally receives RISES resulting in a RISE in quantity supplied (Law of supply).

--PRIVATISATION--

• In the case of fines, the firm is often too large and the amount is inconsequential.

• NATIONALISATION in this case refers to when THE GOVERNMENT EITHER SETS-UP and RUNS an INDUSTRY or TAKES OVER THE RUNNING OF A PRIVATELY RUN INDUSTRY.

• DIRECT PROVISION refers to when the governments produce or pay private sector firms to produce goods and services such as MERIT GOODS and in particular PUBLIC GOODS and raise the finance through taxation.