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Mixed economic system (Unit 15) - Coggle Diagram
Mixed economic system (Unit 15)
combines government planning and ownership of resources and also free market economy to determine the allocation of resources in economy
ownership & control of resources is divided between private and public sector
How
can gov. correct market failure in mixed economy
gov. can employ factor of production to produce & supply public goods and merit goods
provide welfare benefits to people who are poor
(narrow wealth gap)
support people who are unemployed by giving financial support / retraining them (teach them some skills to be able to do some job)
ban the production & sale of harmful goods (demerit goods) e.g. weapon / drugs
introduce laws to protect animal welfare & environment
intervene in market to talk about market failure by imposing several measure / action
Gov. policy measures:
imposing regulation
imposing indirect taxes
giving subsidies (subsidy = financial support of payment provided by gov. to private firms to encourage desirable activities/ increase production)
direct provision of goods & services e.g. invest in new school, hospital / provide training & education
Imposing regulation & price controls
regulation : legal rules made by government to control the way sth is done / people or firm behave
people & firms that fail to obey the regulation need to pay fines
regulation --> used to control forces of demand & supply in market to produce product that are considered economically desirable that other that would not
price controls : legal minimum or maximum prices set by gov. in market for certain goods or services
Example of regulation to control markets
ban / restrict production or consumption of demerit goods which creates external costs
protect animal welfare & natural environment ( ban on testing of cosmetic on animals and limits types & amount of pollutant different firms can release)
set minimum acceptable service standards including product safety & quality, delivery times & consumer complaint procedures
HOW
do gov. impose price controls:
Setting maximum price (price ceiling)
method of price control which gov. set price of certain product
below
market equilibrium price
WHY? : to make products more affordable and encourage consumption
Setting minimum price (price floor)
method of price controls in which gov. set the price for certain product
above
market equilibrium price
WHY? :
make product more expensive & reduce consumption (demerit goods)
encourage output of certain goods or services (some agriculture products, labour supply)
Imposing indirect taxes:
it is impose on the
producers/suppliers
of specific goods & services
additional cost of production that private firms
must pay
to gov. therefore the firms will attempt to pass these additional costs of these taxes to consumers
aim: to reduce
both
consumption and production of products
many gov. used indirect taxes to increase market price of demerit goods/services that are considered undesirable e.g. tobacco, alcohol, gambling
ADVANTAGES
:
increase the price so this will reduce the quantity demand although the amount will depend on the elasticity of product (at least reduce a little)
generates tax revenue for gov. which can be used to fund other gov. project (improving healthcare, infrastructure, education)
DISADVANTAGES
:
if demand of products is inelastic --> increase in price may have little impact on consumption level
indirect tax is
regressive
which means their burden as a proportion of income is greater on people with low incomes that it is on ppl with high incomes
Giving subsidies:
a financial support / payment provided by gov. to private firms to encourage desirable activities e.g. to increase production
are usually paid as
non-repayable grants
but also include
tax reduction & low cost loans
often provided to encourage consumption of certain goods & services by decreasing the prices
Privatization & Nationalization:
privatization - transfer of ownership of assets from public to private sector
nationalization - purchase of private sector assets by gov.
state-owned - companies owned by gov.
Advantages : (privatization)
gov. could get large sum of money from sales proceeds
helps reduce gov. debt
reduce costs to taxpayers who no longer have to pay to finance operation of business
private sector will have initiative to improve efficiency in order to remain comeptitive
Disadvantages : (privatization)
may create private sector monopolists
need require gov. regulation & intervention to protect public interest
trade-off (opportunity cost) as state-owned enterprises can provide social benefits as their aim is no to maximize profit