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Chapter 3

The document discusses the features of a market economy and mixed economy. It outlines the key characteristics of each system such as private property, freedom of choice, and profit motive in a market economy. For a mixed economy it notes price determination and ownership can involve both government and individuals. The document also examines market failures and reasons the government may intervene in areas like merit goods, demerit goods, and imperfect competition.

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11 views2 pages

Chapter 3

The document discusses the features of a market economy and mixed economy. It outlines the key characteristics of each system such as private property, freedom of choice, and profit motive in a market economy. For a mixed economy it notes price determination and ownership can involve both government and individuals. The document also examines market failures and reasons the government may intervene in areas like merit goods, demerit goods, and imperfect competition.

Uploaded by

suyeebnayeem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ABU NAYEEM MOHAMMED SUYEEB

CONTACT: 017524085, 01857175686

Chapter: 3 Economic System

Market Economy – Features

• Private property: In a free market economy, individuals have the right to own and
control land, buildings, machinery etc. There is a private ownership of property.
• Freedom of choice: Producers are free to produce what they want, and consumers are
free to purchase what they want, without any government intervention.
• Price mechanism: Prices are determined by the market forces of demand and supply.
For example, an increase in the demand for a product will raise its price, while an
increase in supply will decrease its price.
• Profit motive: Firms will aim to maximize profit, labour will aim to maximize their
income. As a result this will increase their levels of productivity and hard work.
• Limited role for the government: In a free market economy, the role for the
government and interference is very limited. Their role is to securing national defense
and maintain law and order.

Mixed Economy – Features

• Price Determination: Most firms’ prices are determined by the market forces of
demand and supply. However some prices are set by the government.
• Ownership: In mixed economy, the ownership of land, buildings, machinery is own and
control by both government and individuals.

Market Failures
Market failure is a situation in which the allocation of goods and services by a free market is
not efficient.

• Merit Goods: These goods are goods whose consumption involves external benefit. These
goods are usually very expensive and should be provided by the government. Ex. Health and
Education.
• Demerit Goods: Goods whose consumption involves external costs. These goods are
overprovided in a free market economy. These goods are usually taxed by the government
to reduce consumption. Ex. Cigarettes and Alcohol.
ABU NAYEEM MOHAMMED SUYEEB
CONTACT: 017524085, 01857175686

• Public Goods: Public goods are non-excludable (consumers cannot be charged a price). They
are not provided by private firms, as consumers cannot be charged a price. Therefore these
goods are provided by the state. Ex. Street lights, National defense.
• Imperfect competition: Imperfect competition may exist in a free market economy, in the
form of oligopoly and monopoly. The government is required to protect consumer interests
in these situations.
• Imperfect distribution of income and wealth: It is another major problem in a free market
economy, and the government is require to set up a progressive income tax system to
reduce the gap between the rich and poor.

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