Mixed economic system — practice questions

Step 1 — Equilibrium (a): 9 000 − 5R = 1 000 + 5R → 8 000 = 10R → R = $800. Quantity = 9 000 − 5(800) = 5 000 flats.

Step 2 — At the maximum rent (b): Qd = 9 000 − 5(600) = 6 000; Qs = 1 000 + 5(600) = 4 000. Shortage = 6 000 − 4 000 = 2 000 flats. Note that 1 000 fewer flats are rented than at equilibrium: some landlords withdraw or sell up.

Step 3 — Benefit (c): the 4 000 tenants who do find a flat pay $600 instead of $800 — $200 a month more to spend on other things — so housing is more affordable for them.

Step 4 — Problem (c): 2 000 would-be tenants cannot find a flat at the legal rent. Waiting lists grow, landlords may let to whoever pays an illegal premium (a black market), and with lower returns landlords spend less on maintenance. The control is only effective because $600 is below the equilibrium of $800; a ceiling above $800 would change nothing.

Diagram: D and S crossing at (5 000, $800); a horizontal line at $600 with the shortage gap between Qs = 4 000 and Qd = 6 000.

Step 1 — Street lighting is a public good (a): it is non-excludable — once the lamps are lit nobody can be stopped from benefiting, so people will not pay (the free-rider problem) — and non-rival — one person using the light leaves no less for others. With no way to charge, a private firm earns no revenue, so the market fails to provide it and the government supplies it from taxation.

Step 2 — Bread is a private good (b): it is excludable (you must pay) and rival (a loaf eaten is gone). Competing bakeries have a profit incentive to supply the quantity and variety consumers want, and competition keeps prices low. The price mechanism allocates resources efficiently, so government provision is unnecessary.

Step 3 — Another example (c): vaccinations or education — merit goods that consumers under-value and that create positive externalities, so the government provides or subsidises them. Defence is another public good.

Step 4 — Link to the mixed economy: markets allocate most goods well but fail for public goods, merit goods and externalities; the public sector fills those gaps. That combination is what makes the economy mixed.