Ch11 - the mixed economy

• 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
• Private sector


  • Ownership and control by individuals or groups of individuals
  • Goods and services provided are mostly consumer goods such as groceries and consumer durables
• Types of private enterprises


  • Sole traders
  • Partnerships
  • Companies
• Sole traders

  Business owned and controlled by one person
• Partnerships


  Business owned and controlled by two or more people working together, often found in professional services
• Companies


  Business owned by shareholders who elect a board of directors to run the business on their behalf
• Aims of private sector

  • Survival
  • Profit maximisation
  • Growth
  • Social responsibility
• Survival


  When a firm is first set up, the initial aim may simply be to survive as it takes time to establish a business
• Profit maximisation


  The owners of most firms are in business to make a profit
• Growth


  Many firms aim to grow because bigger businesses enjoy advantages like economies of scale
• Social responsibility


  An increasing number of firms aim to be good corporate citizens and please a wide range of stakeholders
• Public sector


  • Owned and controlled by local or central government
  • Examples: central government departments, public corporations, local authority services
• Aims of public sector


  • Improving the quality of services
  • Minimizing costs
  • Allowing for social costs and benefits
  • Profit (in some countries)
• Improving the quality of services


  Public sector organisations aim to improve the standard of their services, using performance indicators to monitor quality
• Minimizing costs


  Government resources are scarce so it is important that waste is minimised, leading to regular cost-cutting efforts
• Allowing for social costs and benefits


  Since their aim is not to make profit, public sector organisations take into account of externalities when making decisions
• Profit


  (in some countries) The government owns large businesses that aim to make a profit, e.g. Emirates Airlines and Dubai World in the UAE
• Free/Planned/Mixed economy

  • Market or free enterprise economy relies least on the public sector
  • Command or planned economy relies entirely on the public sector
  • Mixed economy relies on both public and private sectors
• Most economically free countries: Singapore, Australia, USA
• Examples of planned economies: Cuba, North Korea
• Currently, the majority of countries are a mixed economy
• How the problems of what to produce, how to produce and for whom to produce are solved in the mixed economy

  1. What to produce: Private sector produces consumer goods, public sector produces goods the private sector fails to provide

  2. How to produce: Private sector uses competition and profit motive, public sector decides how to efficiently provide services

  3. For whom to produce: Private sector sells to anyone who can afford, public sector provides goods and services free paid for by taxes
• Reasons for government intervention due to market failure

  • Externalities
  • Lack of competition
  • Missing markets
  • Lack of information
  • Factor immobility
• Externalities


  Firms do not take into account all the costs of production, e.g. pollution
• Lack of competition

  A market may fail if it becomes dominated by one or a few firms who can exploit consumers
• Missing markets

  Public goods and merit goods are not provided by the private sector in sufficient quantities
• Lack of information

  The market will only be efficient if there is a free flow of information to all buyers and sellers
• Factor immobility

  For the market to be efficient, factors of production must be able to move freely from one use to another
• Government interventions to address market failure

  • Regulating/fining businesses with externalities
  • Preventing anti-competitive mergers
  • Providing public/merit goods
  • Improving information flows
  • Improving factor mobility
• Public goods

  • Non-excludability: individuals cannot be prevented from consuming
  • Non-rivalry: consumption by one individual does not reduce availability to others
• If the private sector provided public goods, there may be a free rider problem
• Relative importance of public and private sectors in different economies

  • Countries with dominant public sector: China, Sweden, Hungary
  • Countries with dominant private sector: USA, Australia
• Different countries vary their commitment to government involvement in the provision of public services