Public Economics lecture 3: mixed economy and the market economy

Public Economicslecture 3: mixed economy and causes for public sector existence1Determination of the mixed economy2Basic economic questionsWhat? How? For whom?

considering who gives the answer for such questions may determine the type of the economy;Traditions ->Traditional economy;government decisions and economic plans -> Command economy-;interaction of demand and supply -> Market economy.=> Actually do not exist a pure form of the former types but a mixture of them called the mixed economy.3What does mixed economy mean?Consists on an economic system based on the coexistence of:

Profit and non- profit sectors;

Different forms of ownership.

Market (price, profit, loss) + state (taxation, expenditure and regulation) 4Market economy5DefinitionsMarket

Place where buyers and sellers meet for trade activities.

Organization inside what buyers and sellers activate, those activities determine the price and the traded quantity of goods. 6Definitions

Market mechanism process of a mutual adaptation of prices and the produced quantity of goods based on a free individual decision.

Market sector -=( profit sector) economy working with principals of market mechanism.

7Basic market advantagesSovereignty of the economic entities;allocated according to needs;private ownership;Entrepreneurial spirit, creativity and adaptability;effectiveness;innovation;Zero cost;economic equilibrium and growth.

8Basic market drawbacksCompetitive;pure (collective) public goods;externalities;short run horizon decision- making;quantitative vs. Qualitative criterions. incomes and wealth;human potential.

9causes for public sector existence10Microeconomic causes. Efficiency of the economic system.

Macroeconomic causesStabilization of the economic aggregates

Exogenous cause More connected to social considerations.

11Microeconomic causes allowing the existence of the public sector 12Microeconomic causesnon- competitive market;

asymmetric information;

non-complex market;

collective (public) goods;

externalities.13non- competitive marketMarket structure different from competitive market;

Monopoly, oligopoly, monopolistic competition and monopsony oligopsony;

Possibility to influence the markets price. 14Abuse from the dominant position Resulting from the market power of one or more than one firm;

Ex. The use of unequal price power or other unequal trade conditions, bounded trade, discrimination, unequal discounts in order to destabilize competitors.

Market power share of the market for one firm and its competitors. 15Monopolyextreme case of abusing from the dominant position; Situation where there is only one firm in one field;entrance barriers nature to field -Administrative monopolyNatural monopoly 16cartel agreement Different forms.

Regulations ways for non competitive market:legislation; regulator;Nationalization /public ownership.17Insufficient informationUseful for buyers and sellers; asymmetric information between buyers and sellers;Regulation way:Legislation;Institutions.

18collective (public) goodsInability to guarantee some goods (mainly goods consumed collectively); Pure or mixed collective (public) goods.

State intervention.19Non-complex marketsThe market may also fail to guarantee some private goods.

Correcting this market failure, the government (state) intervenes to guarantee their production and distribution.

20ExternalitiesSide and non-intended effects of certain activities, inability to prevent the coming of negative externalities /production of positive externalitiesThe role of the public sector

21Macroeconomic causes allowing the existence of the public sector 22Macroeconomic causesInsufficient use of resources, first of all the human potentialities.

Ensure the stability of the major macroeconomic aggregates.

23Insufficient use of resources (human potentialities)Human potentialities definitionConditions that a person needs for the realization of the basic socioeconomic functions (as a citizen, family member, worker, consumer)Conditions- Health, education, values, participative, creative. The role of the public sector - PPF24stability of the major macroeconomic aggregatesEconomic growth, price stability, full employment and external balance of the economy.

The use of the economic policy instruments.25exogenous causes allowing the existence of the public sector 26exogenous causesConservation of the institutional values;

Respect of human dignity;

suitable future for citizens and sustained development;

Moderate the inequalities between individuals;

Increase the quality of human potentialities.27Conservation of the institutional values and human dignityInstitutional values conservation norms and values. The respect of human dignity - consumption of private goods.28Ensure a suitable future for citizens and sustained developmentthe market is oriented on the attainment of immediate interests. Ex. Pollution and resource depletion29Need to promote the quality of human potentialEqual opportunities for their development;

Mainly the market fail in promoting the human potential quality especially in education and health care.30Moderate the inequalities between individualsThe market have a tendency to the polarization of richness and poverty among the society.

Poverty: situation when individuals may not have the basic minimum for surviving;Situation when households net revenues do not cross % 50 the average for such households revenues.31Poverty consequencesLess consumption;Potential stagnation;Manipulable and vulnerable;Subject for a social unrest.32Consequences of richnessCapital concentration;Waste tendency;Ability to influence the political process;Denied any policy tending to resolve poverty.33Solution for the polarization of richness and poverty collective ownership.Redistribution in order to reduce the negative poverty results.Redistribution in order to delete the poverty.34Thank you for your attention 35