Chap11

• Markets can fail
• Reasons for market failure

  • Lack of competition
  • Missing markets
  • Negative externalities
  • Lack of information
  • Immobility
• Lack of competition


  Consumers forced to pay higher prices
• Missing markets


  Not all goods provided by market system, state needs to intervene to provide to consumers i.e. street lighting
• Negative externalities


  Additional costs for companies i.e. protection of environment
• Lack of information


  Inefficiencies i.e. wrong prices paid
• Immobility


  Specialised machines cannot be used elsewhere => resources are wasted
• Goods/services provided by government

  • Military goods
  • Roads and motorway construction
  • Emergency hospital treatment
  • Policing
• Goods/services provided by private businesses

  • Electrical goods
  • Cars
  • Fruit and vegetables
  • Holidays
• Goods/services provided by government

  Essential to the security and well being of the country, very expensive to provide => only government can do so by collecting taxes
• Goods/services provided by private businesses

  Consumer goods, production can be managed and funded by companies
• Public sector


  • Healthcare
  • Education
  • Defense
  • Public Transport
  • Water Supply
  • Electricity
  • Street lighting
• Public sector


  • Consistent standards in all areas
  • Provide to everyone
  • Prevent monopolies making high profits
  • Ensure continuous supplies
• Private sector


  • Individuals
  • Businesses owned and controlled by individuals or groups of individuals
• Private sector


  Supply goods and services to anyone who wants and can afford to buy
• Private sector


  • Profit maximisation
  • Growth
  • Survival
• Social protection is the largest item of expenditure for the UK government (£161 billion -> more than a quarter of all government spending)
• If government borrows money

  It must pay interest -> £30 bn debt interest is the interest paid by the government on the amount it has borrowed
• Economy


  System that attempts to solve basic economic problem
• Types of economy


  • Free Market
  • Command/Planned
  • Mixed
• Free-market economy


  • Vast majority of goods and services provided by private sector
  • Allocation of resources determined by market forces (supply & demand)
  • Little government intervention limited to providing a legal and monetary system and key state services i.e. defence / police
• High free market economies

  • Hong Kong
  • Singapore
  • Australia
  • New Zealand
  • Switzerland
• Command or planned economy

  • Economic resources owned, planned, organised and controlled by the government
  • The government controls the means of production and the distribution of wealth, dictating the prices of goods and services, and the wages workers receive
• There are no clear examples of countries with clear command economy i.e. North Korea, Cuba
• Mixed economy


  • Economic resources are owned and controlled by both private and public sectors
• Nearly every country in the world has a mixed economy
• What to produce in a mixed economy

  • Consumer goods such as food, clothes, entertainment are best provided by private sector
  • Other goods such as education, street lighting, protection more likely to be provided by the state
  • Public sector provides goods that private sector tends to fail to provide in sufficient quantities due to market failure
• How to produce in a mixed economy

  • Due to competition there is choice and variety to consumers and firms use production methods to maximise quality and minimise costs
  • Some public sector goods are produced by private sector i.e. motorways are provided by state but state pays private sector companies to make the constructions
• For whom to produce in a mixed economy

  • Goods in the private sector are sold to anyone who can afford them
  • Goods in the public sector are provided free to everyone and paid from taxes
• Efficiency in a mixed economy

  • Aim is to produce goods and services efficiently: low production costs, minimise quantity of resources used in production, only produce those goods that are needed
  • Due to competition in private sector => goods are produced more efficiently than in public sector
• Resources are sometimes wasted => inefficiency => market failure
• Reasons for market failure

  • Externalities
  • Lack of competition
  • Missing markets
  • Lack of information
  • Immobility
• Externalities


  Production => cost on society => air pollution => negative externality => will create additional costs to companies which need to comply with health & safety regulations to avoid penalties and fines (even forced to close)
• Lack of competition


  If no competition => few companies dominate the market =>can charge very high prices and take advantage of people
• Missing markets


  • Public goods => provided free by government since not possible to charge consumers
  • Merit goods => goods provided by private sector but are under-consumed because too expensive and government provides as well for free
• Lack of information


  • Consumers need to be aware of everything about nature, price, quality of products and firms need to know everything about resources and production techniques
  • Lack of information => wrong items being purchased/produced or wrong prices being paid
  • Internet => improved efficiency of markets
• Immobility


  • Factors of production must be able to move freely from one use to another (capital, labour)
  • A specialised machine will be wasted if specific production stops
• Before 1991, and the break-up of the Soviet empire, the Ukraine had a planned economy. During this time large and inefficient state-owned factories, enterprises, and collective farms wasted resources and emphasised quantity over quality. Prices were set by the state and consumer goods were often in short supply. There was also heavy spending on military goods at the expense of consumer goods. These problems are typical of those faced by planned economies.
• New approach to resource allocation in Ukraine to encourage the production of consumer goods in the private sector: reduced the number of government organisations so the public sector is now smaller, improved the tax system and created a legal environment to encourage entrepreneurs, which will help businesses to flourish, reduced military production and converted military factories so that they can produce consumer goods.
• In a mixed economy (more open/free economy than command) there is international trade. This means that a country both exports and imports goods. The graph in Figure 2 shows that both exports and imports for the Ukraine have more than doubled in recent years. The growth in international trade has been consistent since breaking away from Soviet control. Also, for the first time in 2006, imports ($43.8bn) exceeded exports ($42.2bn).