CHAPTER 11 – THE MIXED ECONOMY

Vocabulary
Economy=system that attempts to solve the basic economic problem
Private sector=provision of goods and services by businesses that are owned by
individuals or groups of individuals
Public sector=government organisations that provide goods and services in the
economy
Enterprises=private businesses, organisations
Durables=products that have a life more than 3 years from when they are made
Shareholders=people or organisations that owns shares in a company
Dividend=part of a company’s profit that is divided among the people with shares in
the company
Stakeholders=individuals or groups who are considered to be an important part of an
organisation or of society because they have responsibility
Market failure=where markets lead to inefficiency
Mixed economy=economy where goods and services are provided by both the
private and the public sectors
Merit goods=goods that are underprovided by the private sectors
Public goods=goods that are not likely to be provided by the private sector
Privatisation=act of selling a company or activity controlled by the government to
private investors

Public and Private sectors

Goods and services may be provided by the public or private sector.
In private sector, groups can set up their businesses and supply their goods and
services to anyone who wants to buy them.
In public sector, government organisations provide free services (paid by tax revenue
or borrowing) that are offered inefficiently by the private sector/ health care,
education, defence.

Private sector
Ownership and control
Goods and services provided by businesses owned and controlled by individuals or
groups.
 Sole traders: one person/ retailers, electricians
 Partnerships: two or more people working together/ professions, accountants,
architects
 Companies: shareholders elect a board of directors to run the business on
their behalf/ manufacturing, engineering
Multinational companies operate all over the world.
Aims
Aims determined by owners, main aim to make profit.
 Survival: when a firm first set up owners don’t expect to make profit
immediately, takes time to establish business (unexpected difficulties).
Trading conditions may be difficult, they want the business to survive.
 Profit maximisation: want to make profit, companies pay a dividend to
shareholders who want it to be as high as possible. Some firms want to
make just enough profit to keep owners satisfied.
 Growth: firms aim to grow because bigger businesses enjoy some
advantages. Profit will be higher. Jobs more secure, however a problem
caused by growth is that profit is used to finance it therefore dividends
might be lower.
 Social responsibility: good corporate citizens, aim to please a wider range
of stakeholders/ environmentalists, workers

Public sector
Ownership and control
Owned and controlled by local or central government.
 Central government departments: defence, healthcare controlled by teams or
boards led by a government minister.
 Public corporations or state-owned enterprises are owned by the
government / responsible for key policies/ state-funded, government provides
capital from money of taxation/ assets and liabilities belong to state
 Local authority services: libraries, sports halls, emergency services, house for
homeless
 Other public sector organisations: led by experienced expert following
government advise
Aims
Depend on the services they provide (don’t make profit)
 Improving the quality of services: improve standard, reliability,
professionalism, speed of service
 Minimising costs: waste is minimised
 Allow for social costs and benefits: when making decisions, consider
externalities
 Profit: in some countries, government owns a number of large businesses that
aim to make a profit

Types of economy
 A market or free enterprise economy - Capitalism
Relies least on public, vast majority on private (Singapore, Australia, USA)
 Command or planned economy - Communism
Relies entirely on public sector/ government responsible/ prices set by state
(North Korea)
 Mixed economy
Relies on both (majority of countries)

The mixed economy

What to produce?
Consumer goods best provided by private. Public sector provide goods that private
may fail to provide in sufficient quantities. Caused by market failure.
How to produce?
Competition, choice and variety to consumers. Some public sector goods are
produced by private sector/ construction of roads
For whom to produce?
Goods produced by private sold to anyone who can afford them. Public sector goods
provided free, paid from taxes.
Governments decide on degree of mixing

Market failure and the need for government intervention

Market failure is where markets lead to inefficiency.
1) Externalities: effects on third parties affected by costs of production. External
cost.(heavily regulated or fined)
2) Lack of competition: no competition means that one or some firms become
dominant/ exploit consumers, charging high prices and limiting choice
(government uses legislation to prevent business dominating markets.)
 3) Missing markets: public goods not provided by private sector. Defence, street
lighting. Merit goods, education underprovided by private sector because they
are expensive and not anyone can buy them. (state money to provide public
and merit goods. Public sector provides them free)
4) Lack of information: may result in the wrong goods being produced or
purchased or wrong prices being paid. (government passes legislation forcing
firms to provide more information of products, internet helps)
5) Factor immobility: factors of production mobile/ labour and capital must be
able to move from one use to another. Factors can be immobile. (Government
may make some factors mobile, retraining workers when jobs become
redundant, can do little to avoid waste of resources.)

Role of private and public sector in the production of goods and services
Non-excludability: once a public good is provided no consumer can be excluded
from its consumption. Cannot refuse consumption.
Non-rivalry: consumption of a public good by one individual cannot reduce the
amount available to others.
Free rider problem: someone who enjoys the benefit of a good but doesn’t pay it
through taxes, street lighting, and police

CHAPTER 12 – PRIVATISATION
Vocabulary
Nationalised industries=public corporations previously part of the private sector that
were taken into state ownership
Nationalised monopolies=situation that occurs when one firm in an industry can
serve the entire market at a lower cost than would be possible if the industry were
composed of many smaller firms.
Incentive=something that is used to encourage people do something
Diversified=if a company or economy diversifies, it increases the range of goods or
services it produces
Hostile takeover=takeover that the company being taken over does not want or
agree to
Takeovers=act of getting control of a company by buying over 50 per cent of its
shares
Privatisation involves transferrin public sector resources to the private sector.
Sale of nationalised industries: provided services that were unprofitable so sold back
to public sector. Would serve consumers more effectively under state control.
However sold to private sector after some time.
Contracting out: small part of organisation is given to private sector/ school cafeteria
The sale of land and property: people renting local, council-owned properties were
given the right to buy their own homes.

Why does privatisation take place?

To generate income: the sale of state assets generates income for government.
Public sector organisations were inefficient: nationalised industries lacked incentive
to make profit/ made losses. In private sector cut costs, improve services, return
profit to shareholders. More accountable. If customer needs not met then company
may lose customers and struggle to survive.
To reduce political interference: in private government can’t use organisations for
political aims. Unstable due to government interference/ holds back performance.
Privatisation has become popular in many countries.

Effects of privatisation
Consumers
In private sector business under pressure to meet consumer needs and return profit
to owners. Business efficient, provide good quality products, charge reasonable
prices and grow. However consumers see both improvement and decline. May rise
subsidies affecting taxpayers, increased costs.
Workers
Usually when a firm privatises a large number of workers become redundant. May
reduce costs. Workers that can actually keep their job in the privatised organisation
will be given more chances to enhance their skills. Promotion chances increase and
workers may become more satisfied with their job. Inefficient workers lose job. To
prevent losing job workers may become more productive/ more flexible working
practises. Helps Competition in global market.
Businesses
 Objectives changed, profit main aim.
 Increased investment
 Mergers and takeovers
  Firms Diversified into new areas
Government
Huge amount of revenue generated. However privatisation expensive, advertising
the sale. Money spent on promoting was at taxpayer’s expense, some state assets
sold off too cheaply. Governments failed to maximise revenue but can now
concentrate on business of government. Firms that don’t have importance in the
national economy may be privatised because too many state owned firms
experienced hostile takeover after privatisation. Government may try renationalised
privatised firms such as energy producing companies.

CHAPTER 13 – EXTERNALITIES
Vocabulary
Third parties=someone who is not one of the two main people or organisations
involved in an agreement or legal case
External costs=negative spillover effects of consumption or production - they affect
third parties in a negative way
External benefits=positive spillover effects of consumption or production – they bring
benefits to third parties
Private costs=costs of an economic activity to individuals and firms
Social costs=costs of an economic activity to society as well as the individual or firm
Private benefits=rewards of an activity to the individual performing it
Social benefits=benefits of an economic activity to society as well as to the individual
or firm
Pollution permit=government issued document that gives a business the right to
discharge a certain quantity of a polluting material into the environment

External costs of production

Cost incurred by third parties (outside the business) may be a resource or local
residents. External costs may be:
- Resource depletion
- Noise pollution
- Traffic congestion
- Overcrowding
- Water pollution
 - Air pollution

External benefits of consumption

Education: will benefit those attending schools, likely to get better jobs, earn more
money, and enjoy better quality of life. Can benefit society, people educated can do
highly skilled jobs, socially useful jobs (doctors, teachers) productivity will be higher
and standard of living for the society will rise. Will lower unemployment, improve
household mobility, and raise rates of political participation
Health care: individuals consuming health care benefit personal health. If people are
healthier are able to work more effectively making contributions to economic output
and paying taxes, benefits the society.
Vaccinations: individual receiving injection protects themselves and third parties.
The more people vaccinated the likeliness of others who don’t get vaccinated
contracting disease is lower.

Social cost
Consumption of a good has Private costs and external costs. The cost to society
(social cost) are private and external costs together. SC= PC+EC

Social benefit
Private and external benefits. Social benefits are private and external benefits
together. SB=PB+EB

Government policies to deal with externalities

Government wants to discourage economic activities that result in negative
externalities and encourage those that result in positive externalities.
 Taxation: reduce external cost of production, if a tax imposed on firm then
production costs will increase and prices charged will rise therefore fall in
demand and reduction in external cost. Taxes used to reduce external costs of
consumption, reduce supply, raise the price therefore demand falls and fewer
third parties affected. However products with inelastic demand may not have
significant fall in demand. Size of tax important.
 Subsidies: government can offer money, subsidies, and financial rewards to
firms as incentive to reduce external costs. Give subsidies to firms that
generate external benefits, subsidies to schools/universities to encourage
people get educated and society benefitted from better-educated population.
However, opportunity cost as money spent on subsidies might be spend more
effectively on other government projects. Government must ensure that
subsidy used correctly, size of subsidy matters.
 Fines: reduce external costs, imposed to firms that pollute. Size matters, firms
might get away.
 Government regulation: pass legislations, protect environment/ laws directed
to businesses aiming to reduce external costs of production. However firms
may not obey the rules, government may lack the commitment to enforce
laws or not have enough resources to enforce them. Companies polluting
might be powerful, multinationals and might stand firmly against government
regulations.
 Pollution permits: give the firm the right to discharge a certain amount of
pollution. Permits tradeable, a business can sell its permit to another business
if found a way of reducing level of pollution. A firm that needs it can buy it and
discharge more pollution legally. This creates incentive to introduce new
technology that reduces pollution and then sell permits for cash, raising
profits. However government has to decide how many permits to issue/
affected by other laws/ pollution difficult to measure and government might
give little or too many permits. Cost of permit administration high, business
may disguise levels of pollution when difficult to measure.
Benefit of these is that revenue is generated through policies and income
received to government can be used to promote positive externalities and reduce
negative externalities.