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Difficulty: EasySolutions to Basic Economic Problems across Systems

In a mixed economic system, while market forces regulate private goods, how is the basic economic problem of 'what to produce' resolved for non-excludable public goods such as national defense and public roads?

  1. By direct government planning and budgetary allocation based on social welfare prioritiesAnswer
  2. B
    By the automatic interaction of consumer demand and producer supply via the price mechanism
  3. C
    By ancestral customs and traditional practices handed down through generations
  4. D
    By profit-maximizing private enterprises competing for consumer votes

Answer

In a mixed economic system, the decision of 'what to produce' for public goods is determined by direct government planning and budgetary allocation based on social welfare priorities.
In a mixed economic system, resource allocation is split between the private sector and the public sector. For public goods (like national defense and public roads), market forces fail due to non-excludability and the free-rider effect. Therefore, the government answers the fundamental question of 'what to produce' by directly planning and allocating tax revenues through state budgetary decisions focused on social welfare.

Step-by-Step Solution

1
Identify the economic system and the specific category of goods described in the question.
The context specifies a mixed economic system dealing with non-excludable public goods.
Mixed economies divide resource allocation roles between the market mechanism and state intervention.
2
Analyze how public goods create market failure under pure price mechanism allocation.
Public goods are non-rivalrous and non-excludable, leading to the free-rider problem where private firms cannot profitably produce them.
Since the price mechanism cannot efficiently price public goods, the state must intervene.
3
Determine the government's role in answering 'what to produce' for public goods in a mixed economy.
The government allocates public revenue through state budgetary decisions and central social planning.
This ensures essential public infrastructure and defense services are produced despite market limitations.

Key Concept

Division of resource allocation responsibilities in a mixed economy for public vs. private goods
Estimated Time:45s
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Topics

Solutions to Basic Economic Problems across Systems

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