Chapter15: Mixed economic system (Maximum price (advantages (Inelastic…
Chapter15: Mixed economic system
Mixed economic system
is a system that combines aspects of both market and planned system. It's main motive is to protects private property and allows a level of rights in the use of capital, but also allows for governments to intervene in economic activities in order to achieve social aims.
Examples: The United States Constitution established a mixed economy. It protects ownership of private property. It also limits government interference in business operations. That promotes the innovation that's a hallmark of a market economy.
At the same time, the Constitution encourages the government to promote general welfare. That creates the ability to use aspects of a command economy where needed.
A maximum price occurs when a government sets a legal limit on the price of a good or service
The good is essential for daily living
Encourages black market
The market will become less profitable for firms
Ex:Maximum price for rent. Governments have tried different types of rent control – keeping the cost of renting below a certain level.
Maximum price for food. In some developing economies, there are maximum prices for certain foodstuffs to keep them affordable.
Evaluation of Maximum prices
The most effective way to implement maximum prices would be to also try and deal with the supply. If housing is too expensive, a long-term solution is to build more affordable housing – and not just rely on maximum prices.
the lowest price that can legally be set, e.g. minimum price for alcohol, minimum wage.
Advantages include a reduction of commodity price fluctuations making it easier for consumers to budget their spending, supplier incomes are stabilised (and increased) leading to increased investment in their respected industry.
Disadvantages include the price of food increasing, the opportunity cost of government spending meaning it cant be spent elsewhere.
Government intervention to address market failure
In addition to using maximum and minimum prices to correct market failures, governments can also use a combination of other methods: :
Indirect taxation: One way to solve market failure is to place an indirect tax on demerit goods, such as cigarettes, with the aim of reducing demand for these products.
Subsidies: Governments often provide subsidies to encourage the consumption of certain goods and services. For example, public transport might be subsidised to discourage people from using privates car.
Education: in school many " side-effects" from drugs, alcohol, cigarette are thought to children to prevent disease or even death
Rule and regulations: government can also impose rules and regulations in an attempt to solve market failure