MIXED ECONOMY, MAXIMUM

AND MINIMUM PRICE,

DIFFERENT POLICIEs TAX,
SUBSIDIES, REGULATION
, PRIVATISATION,
By: chaitanya
 MIXED ECONOMY

It has a combination of the features of a planned and market economy. Some

firms are privately owned and some are govt. owned some prices are
determined by market forces of demand and supply and some are set by the
govt. in this type both consumer and the govt. influence what it to be produced.

Govt. should take into account all the cost and benefits that will arise from their
decisions. For Example; even if a railway line and station would not make a
profit in private sector they would be maintained by the state if the benefit to
society is greater than the cost.
 MIXED ECONOMY
Govt. can discourage the consumption of products, that are harmful by imposing taxes
on such products.

Govt. can finance the production of products that cannot be charged for directly
example; DEFENCE

Govt. can prevent private sector firms from exploiting consumers.

Govt. can maximize use of resources, including labour and hence try to ensure that
those people willing and able to work can find jobs.
 MIXED ECONOMY
Govt. will plan ahead to a greater extent than private sector firms
and hence may devote more of its resources to capital goods.

Govt. can help vulnerable groups ensuring that they have access to
basic needs by taxing rich at a high rate.
Maximum (price ceiling) and minimum price

• A Govt. may limit firms ability to set their own prices by imposing price
controls. May set a maximum ceiling on the price in order to enable the
poor to afford basic necessities.(food, clothing, health and housing)
• Shortage – rationing, lottery
 Minimum price – (floor price)
To encourage production of a product govt. may set a minimum price. This is a price
floor, lowest price for producers to charge. So govt will buy to prevent price from
falling down. (agriculture)
 Govt.
• SUBSIDIES measures
AND INDIRECT TAXES:to address
Indirect taxes raisemarket
firms costs offailure
production, whilst
income tax icreases consumers disposable income falls and as a result demand for product falls.
SY is the subsidy per unit.
• Effect of subsidy given to producers is influenced by the size of the subsidy and the price
elasticity of demand. Larger the subsidy more increase in supply. Consumers benefit –
PSXP1and producers benefit - P1XYP2.
 Effect of subsidy on elastic goods
• A subsidy will have more impact on the quantity sold and less on the price.
• Producer benefits – ?
• Consumer benefits - ?
 Effect of tax
• Higher the tax , greater the impact. A tax on inelastic demand will have a
greater effect on price than the qty sold. Elastic other way round.

• Eg. A tax of $ 2 per product may be placed on a product that initially has
sales of 2000 a day. If the tax causes sales to fall to 1800, govt. will
receive $3600. however, if the demand is elastic sales would fall to 900,
govt would be getting only $1800 as tax.
 Competition policy
• Seek to promote competition and no abuse of power. Like few mergers are not allowed in consumers
interest. Removal of barriers, regulation of monopolies and prohibition of uncompetitive practices.

• ENVIRONMENTAL POLICIES:
• Fine any firm which exceed these limits.

• REGULATION:
• Rules and laws, std quality, regular and specified no. of holidays for workers. Timings for opening
and closing of shop.
 Nationalisation and privatisation
• To benefit the public and to improve economic performance, a
government may set up an industry or nationalize a private sector industry.
Industries owned by the govt. are known as SOE, public corporations, and
nationalized industries.
• Chairman and Directors are appointed by govt. but accountable to govt.
• No shareholders in SOE’s. funds come from govt. motto is public welfare.
 Advantages of SOE’s
• To boost the country’s output,
• A SOE would not abuse its market power.
• Eg If train system is SOE it can ensure its time table are coordinated.
• Charges are less as other other domestic industries depend on them.
 disadvantages
• As size of org. is too large so it becomes difficult to manage and control
and even delaying decision making.
• Due to lack of competition they may become inefficient, low quality, high
prices as they are aware that they wont go bankrupt.
• Opportunity cost of subsidizing such org. is unable to build more infra for
the economy.
 Direct provision
• Merit goods – which benefit to consumers like education, health and library.
Govt. motivates people to consume more and people are reluctant to consume.
Sometimes govt. hires private companies for providing such goods to people.

• Eg. It is not possible to exclude someone from enjoying the benefits of street
lighting even if they are not paying for it directly.

• Public goods are non rival goods (this means that person enjoying the product
does not reduce someone else’s enjoyment. Additional family moving into
mamzaar beach, area protected by defence, does not reduce the defence/
SECURITY experienced by other families.
 unfairness
• Govt also intervene on grounds of equity. Income distribution can become
very uneven if it solely determined by market forces. Pvt companies will
only produce products that people are willing to buy and pay for. Will not
produce products needed by poor.
• So in few countries education, health care housing is free or given at very
low price.
Effectiveness of government intervention
• Govt intervention can reduce market failure as in above case.
• Govt. may decide not to increase the tax on petrol, despite concerns about
envt. Because it may be politically unpopular and may loose votes.
• Sometimes govt is over dependent on pvt.
• Govt intervention can reduce efficiency – if taxes are high on profits and
earned income, people are not motivated to work.
 A development of effectiveness of govt.
intervention.
• Do households and firms make better decisions than govt.?
• Lets debate.
 Pvt and public sector expenditure
• Eg. A new airport could be built by the pvt or public sector.
• Advantage if built by pvt.- profit incentive, competition – leads to high quality at low cost and in less
time completion of building it.

Disadvantage if pvt. org. is monopoly then costs will keep increasing and they will charge high price for
building airport and will take into account pvt. Benefits.

IF public expenditure to build – drawbacks: knowing that govt is paying, SOE’s or pvt. hired by govt.
May not keep its costs down. May lack commercial expertise to complete the project on time. Delay in
decision making.