Economic Systems Overview

Economic Systems

• Command Economy (Centrally Planned): Almost all factors of production are owned by the state. Maximum government intervention; the government controls all economic activity. Decision-making is centralized (state decides production and resource allocation). Individuals work for the common good.

• Free Enterprise (Capitalist): Almost all factors of production are privately owned. Minimal government intervention (e.g., providing public goods, national security, and legislation). Private individuals/firms decide production; resources allocated via the price mechanism. Self-interest is key (utility maximization for consumers, profit maximization for firms).

• Mixed Economy: Government plays a crucial role in a mixed economy. It provides essential services (education, healthcare) that private firms might not. State-owned firms also often provide necessary services.

Role of Government in a Mixed Economy

• Essential Services: Provides fundamental necessities that private firms may not provide or might not be profitable to provide e.g. education, healthcare, national train services.

• Regulation: Sets rules and regulations to ensure fair competition, protect consumers, and prevent monopolies. This includes labor standards, environmental protection, and business practices. Regulation prevents unchecked negative effects of capitalism (exploitation, environmental degradation).

• Market Intervention: Government intervention in specific markets sometimes occurs e.g. tax on fossil fuels, subsidies for electric vehicles.

Why Government Intervenes in Markets

• Demerit Goods: Discourages the consumption/production of goods with negative effects on consumers and third parties (e.g., through taxes on alcohol, tobacco).

• Fair Prices: Sets price ceilings (preventing excessively high prices) or price floors (guaranteeing minimum prices to suppliers).

• Encouraging Production: Provides incentives (e.g., Help to Buy scheme) to stimulate desired economic activity (e.g., residential housing development).

• Redistributing Income: Lessens inequality through taxation and welfare programs.

• Economic Stabilization: Manages inflation, unemployment, and economic growth through fiscal and monetary policies.

• Consumer/Worker Protection: Ensures safety, fairness, and rights via regulations and laws.

Taxation

• Incentivizing Activity: Levies influence economic decisions (e.g., low corporation tax attracts foreign direct investment; high DIRT encourages spending).

• Influencing Behavior: Taxes can discourage undesirable behaviors (e.g., taxes on tobacco, alcohol, sugar-sweetened drinks). Adjustments also influence spending e.g. VAT reduction in hospitality.

Examples of Government Intervention

• Sugary Drinks Tax (2018): Reduces consumption of sugary drinks, particularly for children; encourages healthier choices (water); funds health initiatives.

• Minimum Unit Pricing of Alcohol: Addresses excessive alcohol consumption by linking the minimum price to alcohol units in off-licences. (Excludes pubs, restaurants).

• Carbon Tax/Cap-and-Trade/Regulations: Aims at reducing carbon emissions. Incentives to cleaner technologies.

• Plastic Bag Levy: Significantly reduced plastic bag use. Encouraged reusable bags, improved environmental cleanliness.

• Minimum Unit Pricing on Alcohol (2022): Aims to curb alcohol consumption among heavy drinkers by increasing price of cheaper, high-alcohol-content drinks.

Price Ceilings and Price Floors

• Price Ceiling: Sets a maximum price below equilibrium; creates excess demand (shortage).

• Price Floor: Sets a minimum price above equilibrium; creates excess supply (surplus); government may need to buy surplus.

Regulation

• Ensuring Fair Conditions: Regulators (e.g., CCPC) promote fair competition and avoid consumer exploitation; Health and Safety or environmental authorities enforce relevant standards.