Mixed economic system

Economics · The allocation of resources. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

A mixed economic system is one where resources are allocated partly by the price mechanism (the private sector) and partly by the government (the public sector). Most countries are mixed economies.

The government steps in where markets fail. It can change prices with a maximum price, a minimum price, an indirect tax or a subsidy. It can also make rules (regulation), set quotas, own industries, or supply goods and services itself (direct provision).

On a demand and supply diagram, an indirect tax shifts the supply curve to the left, so price rises and quantity falls. A subsidy shifts supply to the right, so price falls and quantity rises. Every measure has a drawback, such as shortages, surpluses or a high cost to taxpayers.

Rules to remember

Maximum price: the highest price sellers may charge. It only has an effect if set below equilibrium, and it causes a shortage (demand greater than supply)
Minimum price: the lowest price sellers may charge. It only has an effect if set above equilibrium, and it causes a surplus (supply greater than demand)
Indirect tax: a tax on goods and services. Price usually rises by less than the tax, so consumers and producers share it
Tax revenue = tax per unit × quantity sold after the tax
Subsidy: a payment by the government to producers. Cost to the government = subsidy per unit × quantity sold after the subsidy
Privatisation: selling state-owned firms to the private sector. Nationalisation: taking private sector firms into state ownership
Regulation: laws and rules, e.g. a ban on smoking in public places. Quota: a limit on quantity, e.g. on the fish that may be caught

Common mistake

Putting a maximum price above equilibrium or a minimum price below it. A maximum price works only below the equilibrium price, and a minimum price works only above it.

Worked example

Fertiliser sells for Rs 200 a kg and 5,000 kg are sold each day. The government gives producers a subsidy of Rs 30 a kg. The price falls to Rs 180 and sales rise to 6,000 kg a day. How much does the subsidy cost the government each day, and how much of the Rs 30 is passed on to buyers?

Cost to the government = subsidy per unit × new quantity = 30 × 6,000 = Rs 180,000 a day.
Fall in price for buyers = 200 − 180 = Rs 20 a kg.
Kept by producers = 30 − 20 = Rs 10 a kg.

Answer: The subsidy costs Rs 180,000 a day. Buyers gain Rs 20 a kg through the lower price and producers keep Rs 10 a kg.

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