The market system — common mistakes

In exam questions asking you to 'discuss' or 'evaluate' the merits of different economic systems, it is crucial to present a balanced argument. For every advantage you state for one system, try to consider a corresponding disadvantage or a strength of another system. For example, 'While the market system promotes efficiency, it may result in an inequitable distribution of income, a problem a planned economy aims to solve, albeit often at the cost of that same efficiency.'

No. The term 'mixed economy' covers a wide spectrum. Some, like the USA, have a relatively small public sector and lean heavily towards the free market. Others, like Sweden or France, have a much larger public sector with more extensive government intervention in the economy through welfare provision and regulation. The specific 'mix' varies greatly from country to country.

Yes, but their function is fundamentally different. In a planned economy, prices are typically set by the state and do not fluctuate based on supply and demand. They are used for accounting, planning, and controlling distribution, but they do not act as signals to guide resource allocation in the way they do in a market economy.

Public goods are non-excludable (you can't stop someone from benefiting from them) and non-rivalrous (one person's use doesn't reduce availability for others). A private firm would be unable to charge people for using street lighting because they cannot exclude non-payers (the 'free-rider problem'). As there is no way to ensure profitability, no private firm would provide the service, leading to market failure. Therefore, the government must provide them and fund them through taxation.