A mixed economic system combines features of a market (capitalist) economy and a command (socialist) economy. Private individuals and firms own most resources and make most production decisions, while the government intervenes to correct market failures, provide public goods and achieve social objectives such as equity and stability.
| Tool | Purpose / Typical Use | How it corrects a market failure | IGCSE‑level example | Diagram suggestion |
|---|---|---|---|---|
| Maximum price (price ceiling) | Stop prices rising above a set level – protects consumers. | Prevents monopoly or excessive demand‑driven price spikes (reduces allocative inefficiency). | UK rent control in the 1970s. | Supply‑demand graph with a horizontal line below equilibrium → shortage (excess demand). |
| Minimum price (price floor) | Stop prices falling below a set level – protects producers. | Ensures a fair return for farmers or workers when competitive markets would drive price too low (reduces under‑production). | UK/US minimum wage; EU agricultural price supports. | Supply‑demand graph with a horizontal line above equilibrium → surplus (excess supply). |
| Indirect tax (excise, VAT, sales tax) | Raise revenue and/or discourage consumption of particular goods. | Internalises negative externalities (e.g., tobacco, carbon) – moves market outcome closer to social optimum. | UK VAT (20 %); excise duty on cigarettes. | Supply curve shifts left/up; show tax‑revenue rectangle and dead‑weight‑loss triangle. |
| Subsidy | Encourage production or consumption of a socially desirable good. | Reduces marginal cost for producers/price for consumers, correcting under‑production (positive externalities). | UK renewable‑energy subsidies; school‑meal vouchers. | Supply curve shifts right/down; show subsidy‑cost rectangle and any DWL. |
| Regulation (standards, licensing) | Set safety, environmental or quality requirements. | Addresses information failure and negative externalities by raising producer costs to socially acceptable levels. | EU emissions standards for cars; UK health‑and‑safety rules. | Upward shift of supply (higher marginal cost) or a constraint on quantity. |
| Quota (quantitative restriction) | Limit the amount of a good that can be produced or imported. | Controls over‑exploitation of a resource (e.g., fisheries) and can protect domestic industries. | Fishing quotas in the North Sea; import quota on textiles. | Vertical line at the quota quantity – creates excess demand (shortage) if set below equilibrium. |
| Nationalisation | Transfer private firms into public ownership to control essential services. | Ensures universal provision of merit goods and removes monopoly pricing power. | UK National Health Service (NHS); British Rail (pre‑1990s). | Show a shift from a private‑sector supply curve to a public‑sector one (often a change in market structure). |
| Privatisation | Transfer public assets to private ownership to increase efficiency. | Introduces competition and profit motive, aiming to reduce wasteful public‑sector spending. | British Telecom (BT) privatisation, 1984. | Show a move from a government‑controlled supply curve to a private‑sector curve, usually with a lower price and higher output. |
| Direct provision of goods & services | Government produces and supplies a good directly. | Guarantees provision of merit goods (education, health) that the market would under‑supply. | Public schools, NHS hospitals. | Draw a separate public‑sector supply curve alongside the private one for comparison. |
See also Syllabus 2.9 “Market Failure”. Each intervention listed above can be linked to a specific type of market failure (public‑goods failure, externalities, monopoly power, information failure, etc.). Understanding these links is essential for Paper 2 evaluation questions.
An indirect tax is a levy on the sale or consumption of goods and services. It is collected by businesses at the point of purchase and passed on to the government.
| Advantage | Explanation (IGCSE level) |
|---|---|
| Broad revenue base | Applied to many goods and services, providing a steady and sizable source of government income. |
| Ease of collection | Collected by businesses at the point of sale, so administrative costs are lower than for direct taxes. |
| Behavioural influence (Pigouvian effect) | Higher prices discourage consumption of harmful or luxury goods (e.g., tobacco, alcohol, sugary drinks). |
| Progressivity through exemptions or reduced rates | Essential items such as food or children’s clothing can be zero‑rated or taxed at a lower rate, easing the burden on low‑income households. |
| Disadvantage | Explanation (IGCSE level) |
|---|---|
| Regressive impact | Lower‑income families spend a larger share of their income on taxed goods, so the tax takes a higher proportion of their earnings. |
| Market distortion | Higher prices reduce quantity demanded, creating dead‑weight loss and lowering overall economic efficiency. |
| Encourages evasion & black‑market activity | High rates may lead to smuggling, under‑reporting, or cross‑border shopping to avoid the tax. |
| Limited targeting of specific groups | The tax is applied uniformly to all consumers, making it difficult to direct revenue to particular income groups. |
Tax revenue \( \text{Tax Revenue}= t \times Q_{\text{tax}} \)
Dead‑weight loss \( \text{DWL}= \tfrac{1}{2}\, t \, (Q{\text{initial}}-Q{\text{tax}}) \)
where t = tax per unit, \( Q{\text{initial}} \) = quantity before the tax, \( Q{\text{tax}} \) = quantity after the tax.
See also Syllabus 2.9 “Market Failure”. Indirect taxes are a classic tool for correcting negative externalities (e.g., tobacco, carbon emissions). Linking the tax to the specific failure strengthens the evaluation in Paper 2.
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