CAIE IGCSE Economics 2.10. Mixed economic system Question Bank

Explain how the key resource allocation decisions are made in a mixed economic system.

Logical explanation which might include:

Private sector / individuals / households / firms / consumers (1) will use price mechanism (1) demand and supply / demand / market forces (1) influenced by the profit motive (1) use most cost-effective methods of production (1).

Public sector / government / state (1) will use its spending (1) taxation (1) regulation / maximum prices / minimum prices / directives (1) influenced by social costs / social benefits / economic welfare (1).

4

Maximum of three marks if only one sector is covered.

For the last mark: accept, but do not expect reference to 'may carry out a cost-benefit analysis',

In assessing each answer, use the table opposite.

Why it might:

- public goods may be provided

- production of demerit goods may be discouraged

- production of merit goods may be encouraged

- state benefits may be provided

- income may be redistributed to help the poor

- unemployment may be kept low by government policies

- private sector benefits e.g. generate high incomes / lower prices

Why it might not:

- may be market failure in the private sector

- rich may lose if there is high progressive taxation

- high taxation may discourage enterprise

- state-owned enterprises may be inefficient

- may be less choice in the public sector.

8

Level

3

2(d)

8

Level

Marks

1

There is a simple attempt at using economic definitions and terminology.
Some reference may be made to economic theory, with occasional understanding.

1-2

0

A mark of zero should be awarded for no creditable content.

ward up to 4 marks for logical reasons why they might, which may include:

Demerit goods are more harmful than consumers realise / are harmful / consuming less would make people healthier (1) they usually have negative external costs (1) examples include fast food, alcohol and tobacco (1).

Demerit goods are overconsumed (1) and overproduced (1) higher indirect taxes will impose an extra cost / raise cost of production (1) which may lower output / supply (1) be likely to raise price (1) which is likely to reduce consumption (1) lower consumption/lower output/lower supply may move output to a point where social costs equal social benefits (1).

May raise tax revenue (1) which can be spent on campaigns to reduce e.g. smoking (1).

Award up to 4 marks for logical reasons why it might not, which may include:

It may be difficult to change consumers' behaviour / spending patterns (1) some demerit goods are addictive (1) those with high incomes may not be affected by a rise in price (1) demand for demerit goods may be inelastic (1).

Producers may not pass on price rise to consumers / products may be sold on an illegal market (1) to avoid fall in demand (1).

It can be difficult to determine the output of demerit goods which will avoid market failure. (1) the output where social cost will equal social benefit (1).

6

Examples of demerit goods may be rewarded
in why might or why might not.