Market and mixed economies, market failure and intervention

G3 Economics - syllabus K343, 2027

How market and mixed economies work, why markets fail, and the tools governments use to correct them.

• The market economic system

  In a market economy, private firms and consumers decide what, how and for whom through the price mechanism.

• Market failure: the key terms

  Market failure happens when the price mechanism allocates resources inefficiently, producing too much or too little.

• Causes and consequences of market failure

  Markets over-produce goods with external costs, under-produce goods with external benefits, and fail to provide public goods.

• The mixed economic system

  A mixed economy combines markets with government action, aiming to keep the strengths of markets while fixing their failures.

• Maximum and minimum prices

  A maximum price below equilibrium causes a shortage; a minimum price above equilibrium causes a surplus.

• Indirect taxes

  A tax on each unit sold raises firms' costs, so supply falls, price rises and quantity falls.

• Subsidies

  A subsidy lowers firms' costs, so supply rises, price falls and more of the good is consumed.

• Regulation, ownership, direct provision and quotas

  Governments can also make rules, change who owns firms, supply goods themselves, or limit quantities.

• Put it together: Raise flu vaccination rates

  Flu vaccination has large external benefits, but many people do not get vaccinated. The government wants to raise the vaccination rate. Compare four ways to do it.

The K343 syllabus does not require demand and supply diagrams for market failure itself. Diagrams are required for maximum and minimum prices, indirect taxes and subsidies.