The Mixed Economy

Chapter 11
Public Sector

The part of an
economy that is
controlled by the
state. Organisations
owned and controlled
by the government
Private Sector

The part of the

economy, which is
owned and controlled
by private individuals
or groups, usually as a
means of enterprise for
profit
Private sector organisations
Goods and services in this sector are
provided by businesses that are owned
and controlled by individuals or groups
of individuals. Organisations can vary by
size and type of ownership.

They are:
● Sole traders
● Partnerships
● Companies
 A sole trader, also
known as a sole
proprietorship, is
entitled to keep all
profits after taxes have
been deducted but is
also liable for all losses
the business incurs.
A partnership is the relationship between two or more people to do trade or business. Each person contributes
money, property, labor or skill, and shares in the profits and losses of the business.

Partnerships are a common structure for professionals, such as accountants, lawyers, and architects.
Pros: Cons

● Partners can pool their ● Partners may bring

labor, capital and additional debts or
expertise. liabilities.
● Partners can share tasks, ● There is a greater chance
allowing greater work-life of disagreement or
balance. mismanagement.
● More partners can bring
their experience and new
perspectives to the firm.
A separate legal entity is when you and
anyone involved in your company are
separate from your business for legal
purposes. Basically, an SLE means that
if someone takes legal action against
your business, your personal finances are
separate and safe from the legal suit.

If a business is a separate legal entity, it

means it has some of the same rights in
law as a person. It is, for example, able
to enter contracts, sue and be sued, and
own property. A sole trader or
partnership does not have a separate
legal entity.
Companies
● Shareholders own the business
○ Shares represent equity ownership, owned by investors
who exchange capital in return for these units.

● Elected board of directors to run the company

● Shareholders earn dividends

○ A dividend is a distribution of profits by a corporation to
its shareholders.
Some types of companies ...
Private limited
company
This is the most popular type of a
company in the UK as it can be
used for majority of commercial
enterprises. The liability of each
member is limited to the value of
any investment they have made in
the shares of the company. This
type of company cannot offer its
shares for sale to the general
public. Mostly small or medium
sized and run by families/ friends.
use letters ‘Ltd’ or ‘Limited’ after its name
Public limited
company
A Public Limited
Company’s stock can be
acquired by anyone and it
may be quoted on the
stock exchange. Tend to be
larger than private limited
companies.

use letters ‘plc’ after its name

Aims of private
sector organisations
 Some firms only
make enough
profit to keep
owners satisfied.
A sole trader may
not want to deal
with the stress of
expanding the
business. In large
companies
managers may
make enough
profit to keep the
Many shareholders want high dividends due to which
profit maximization is an important objective.
shareholders
satisfied.
A bigger business
means:
● More profit
in the future
● Jobs will be
more secure

But, profit is
needed to finance
growth which
means some
owners like
partners,
shareholders etc.
may not be happy
about this.
 Companies can
act responsibly
in many ways,
such as by
promoting
volunteering,
making
changes that
benefit the
environment,
engaging in
ethical labor
practices, and
engaging in
Big-box retailer Target Corp. (TGT), also well known for its social responsibility charitable
programs, has donated money to communities in which the stores operate, including giving.
education grants.

Ben & Jerry’s Homemade Holdings Inc. purchases Fair Trade Certified ingredients.
Public sector organisations
Organisations owned and controlled by the local or central
government.
● Central government departments- Ministry of Defense. These
departments are usually controlled by teams or boards led by
a government minister.
● Public Corporations or SOE’s - state owned, state funded (
taxes), incorporated businesses. Run by government elected
board of directors. Has a separate legal identity-Great British
railways, Cardiff Airport, Bangladesh Petroleum Corporation or
BPC. Can aim to earn profit
● Local authority services- libraries, fire departments etc ( run by
councillors elected by residents in the local community)
● Other public sector organizations- BBC or the Post Office- run
by a trust or a board led by an expert selected by a
government body, following government advice.
Aims...

● Improving quality of service- performance indicators are

used to monitor quality- league tables to show student
success rates in exams.
● Minimising costs
● Allow for social costs and benefits- account for
externalities during decision making
● Profit- Emirates Airline in UAE, Dubai World
 The Messy Middle in China

In China, companies exist

across a spectrum of
different ownership types,
ranging from wholly
state-owned to completely
private.

Given China’s historical transition from communism, many companies started as state-owned enterprises and
have subsequently evolved towards a more diversified ownership structure.

An example of a company in the mixed ownership category is Ping An Group, a large insurance and banking
conglomerate. Frequently cited as one of China’s largest private companies, Ping An was fully state-owned at the
time of its founding. Over time, the company became more and more privately-owned and the insurance sector
more market-oriented. However, Ping An’s single largest shareholder, Shenzhen Investment, is state-owned..
Command or
Planned economy
Market or free
enterprise economy
Mixed economy
 An economic system that relies on
both the public and private sectors to
provide goods and services
Resolving scarcity in
the mixed economy
What to produce?
 Private sector
Mostly consumer goods as the market
is a better mechanism for
understanding consumers.

Consumer sovereignty...
 Public sector
Anything the private sector
cannot produce at all or in
sufficient quantities...
How to produce?
Private sector
Minimize cost….
Depends on the level of
competition...
 Public sector
Decisions left to people running
the organisation. Should not
waste taxpayer money but
inefficient-> outsourcing
For whom to
produce?
Private sector Public sector
● Access depends on ● Free ( funded by
affordability taxes)
● Allocation through ● Unemployment
the market system benefits
● Different
methods- queues,
ration cards etc.
Degree of ‘mixing’ depends from country to country…
Market Failure
Market failure is the economic
situation defined by an inefficient
distribution of goods and
services in the free market.
Lack of information
 Can affect
consumers, ● Consumers need information
about price and quality of
producers etc. ●
products
Businesses need information
Free flow of information about resources and production
required for efficiency techniques
Lack of competition
High prices-
high fares

Poor service,
limited choice
Bangladesh- a mixed economy

Bangladesh has a mixed economy e.g. land is primarily owned by private

individuals. The farmers are, however, dependant, on the government for
agricultural inputs like diesel, fertilizer, seeds, etc.

The economy of Bangladesh can also be characterised as a developing market

economy since it has a strong capitalist leaning. In 2019, government expenditure
in Bangladesh amounted to about 15.41 % of the country's gross domestic
product ( GDP meaning total output) i.e. majority of the goods and services were
produced in the private sector.
REVIEW
To recap, economic systems determine the following:

What to produce?

How to produce it?

Who gets it?

In a planned economy, government controls the factors of production:

In a true communist economy, there is no private property—everyone owns the factors of production (i.e.
the government). This type of planned economy is called a command economy.

In a socialist economy, there is some private property and some private control of industry.
In a free-market (capitalist) economy, individuals own the factors of production:

Privately owned businesses produce products.

Consumers choose the products they prefer causing the companies that produce them to make
more profit.

Even in generally free market economies, governments will

Maintain the rule of law

Create goods and services such as roads and education

Step in when the market gets things wrong (e.g. establishing environmental standards, create laws
to protect consumers, workers etc.)
In reality, economies are neither
completely free-market nor
completely planned. Neither
exists in “pure” form, since all
societies and governments
regulate their economies to
varying degrees.
Comparison between the market economy and command economy
Market economy
● If there is competition:
○ More variety and
innovative products at
reasonable prices
○ Citizens have a good
lifestyle provided they
have an income
● Better incentives
● More efficient as they
operate through the
market
Command economy
● Less choice
● People may have enough
income to buy necessities
● Incentives may not
motivate everyone
● Supposed to have a more
equal distribution of
income
● Shortages of goods
● Innovation is discouraged
EXTERNALITIES
An externality is the cost or benefit that affects a third
party who did not choose to incur that cost or benefit.

An externality can be both positive or negative and can

stem from either the production or consumption of a
good or service. Externalities lead to market failure
because they are ignored by producers and consumers
and therefore the government has to step in and
encourage products ( e.g. subsidise) with positive
externalities and discourage products ( e.g. tax) with
negative externalities
 Negative
Externalities
The act of smoking destroys the
health of the smoker but it also
destroys the health of those
around them (3rd Party effects)
through passive smoking.
Negative Externalities
These are the negative spillover costs
of consumption or production that are
incurred by third parties.

Examples:

❖ Pollution- air, noise, water etc.

❖ Traffic
❖ Overcrowding
❖ Resource depletion
 Positive
Externalities
Education has external benefits
like educated degree holders are
less likely to commit crime and
education reduces poverty,
promotes gender equality etc.
Positive Externalities

These are the positive spillover benefits of

consumption or production that are
enjoyed by third parties.

Examples:

❖ Education
❖ Health care
❖ Vaccinations
❖ Research and development (R&D)
Missing markets:
MERIT goods
Merit goods are those goods and
services that the government feels that
people will under-consume (because
they underestimate the benefits), and
which ought to be subsidised or
provided free at the point of use so that
consumption does not depend
primarily on the ability to pay for the
good or service.
Merit goods suffer from:
1. Lack of information
Education is a long-term investment
decision. The private costs must be
paid now but the private benefits
(including higher earnings potential
over one's working life) take time to
happen.
2. Positive Externalities
An individual student is generally not
motivated to study hard in order to
benefit others later in life, although
everyone associated with them will
benefit from their education in some
way. Beneficiaries include future
employers and all those who
consume the products supplied their
employer, their family, and friends.
Merit goods aren’t completely missing in the private
sector- they are just too expensive. As everyone
cannot afford them, the private sector wont produce
merit goods for everyone e.g. private education.

So in order to correct market failure- the state has to

provide merit goods for free or at affordable prices
e.g. public education.
Missing markets:
Public goods
Public goods are commodities or
services that benefit all members of
society, and which are often provided
for free through public taxation.

The private sector would not be able to

provide public goods profitably as it
would be impossible to charge users
for consumption.
Factor Immobility
For markets to work
efficiently, factors of
production need to be
mobile ( i.e. free to move
between locations and
sectors of the economy), but
they rarely are which leads
to market failure.
 Occupational
Immobility
Occupational immobility occurs
when there are barriers to the
mobility of factors of production
between different sectors of the
economy leading to these factors
remaining unemployed, or being
used in ways that are not
efficient.
Examples:
Occupationally mobile:
1. a computer can be put to use in
many different industries
2. commercial buildings such as
shops and offices can be
altered to provide a base for
many businesses
Occupationally IMMOBILE:
1. some units of capital are
specific to the industry they
have been designed for – a
printing press.
2. People often experience
occupational immobility.
Workers made redundant in
the steel industry may find it
difficult to find a new job as
their specific skills are not
demanded any further.
 Geographical
Immobility
Geographical immobility refers
to barriers that make it difficult
for resources to move or be
moved to from one geographical
area to another.
Some reasons why labour can’t move easily
from one geographical area to another:
● Family and social ties
● The financial costs involved in moving home including the costs of
selling a house and removal expenses.
● The high cost of renting property
● Differences in the general cost of living between regions and also
between countries
● Cultural and language barriers