Cambridge IGCSE Economics: The mixed economic system and government intervention (0455) – Revision Notes

These revision notes cover section 2.11 (the mixed economic system and government intervention) of the Cambridge IGCSE Economics (0455) syllabus for examination in 2026. For full explanations and longer worked examples, read the study guide. When you are ready to test yourself, use the practice questions. Also useful: the Cambridge IGCSE Economics hub, the printable checklist and the free 10-minute diagnostics. All figures are invented and illustrative.

2.11.1 Definition

• Mixed economic system: resources are allocated partly by the private sector through the price mechanism and partly by the public sector through government decisions.
• Why it exists: markets can fail (public goods missing, merit goods under-consumed, demerit goods over-consumed, external costs, monopoly power, factor immobility), so the government steps in.

2.11.2 Measures at a glance

Measure	What it does	Diagram	Effect	Typical aim
Maximum price	Legal cap below equilibrium	Horizontal line below equilibrium	Shortage	Affordability
Minimum price	Legal floor above equilibrium	Horizontal line above equilibrium	Surplus	Support producers
Minimum wage	Floor in labour market	Wage line above equilibrium wage	Surplus of labour (unemployment)	Raise low pay
Exchange rate floor	Currency price held above equilibrium	Line above equilibrium on currency market	Excess supply of currency, bought by central bank	Strong currency
Exchange rate ceiling	Currency price held below equilibrium	Line below equilibrium	Excess demand, central bank sells currency	Cheap currency
Indirect tax	Tax per unit or percentage	Supply shifts up (left) by the tax	Higher price, lower quantity	Cut demerit goods, raise revenue
Subsidy	Payment per unit to producers	Supply shifts down (right) by the subsidy	Lower price, higher quantity	Encourage merit goods

Method for price-control diagrams

1. Find equilibrium: set Qd = Qs and solve for P.
2. Check the control binds: a maximum must be below equilibrium, a minimum above.
3. Read Qd and Qs at the controlled price.
4. Gap = shortage (if Qd is larger) or surplus (if Qs is larger).
5. Quantity traded is the smaller of Qd and Qs.

Reminder (illustrative): Qd = 100 − 4P, Qs = −20 + 8P gives equilibrium P = 10, Q = 60. A maximum of 7 gives Qd = 72 and Qs = 36, a shortage of 36. A minimum of 12 gives Qd = 52 and Qs = 76, a surplus of 24, and a government buying it spends 24 × 12 = 288.

Labour and currency reminders

• Labour market: price = wage, quantity = number of workers. A minimum wage above equilibrium gives unemployment equal to labour supplied minus labour demanded. Illustrative: Ld = 200 − 10W, Ls = 20 + 10W gives W = 9 and 110 workers; a minimum of 10 gives Ld = 100, Ls = 120 and 20 hundred (2,000) unemployed. Total pay rises from 990 to 1,000 even though jobs fall by 9.1%.
• Currency market: price = units of foreign currency per unit of the home currency. Demand comes from exports, foreign investors and tourists; supply comes from imports and investment abroad. Illustrative: Qd = 500 − 100P, Qs = 100 + 100P gives P = 2, Q = 300. A floor of 2.40 leaves 80 in excess supply, so the central bank spends 80 × 2.40 = 192 from reserves. A ceiling of 1.60 leaves excess demand of 80, so it sells 80 zeds and gains 128.
• Chain for any control: price set away from equilibrium, so quantity demanded and supplied differ, so a shortage or surplus appears, so someone must ration, store or fund the gap.

Method for tax and subsidy diagrams

1. Find the original equilibrium.
2. Shift supply: for a tax of t, replace P with (P − t) in the supply equation; for a subsidy of s, replace P with (P + s).
3. Solve for the new price and quantity (this is the price consumers pay).
4. Producers receive the consumer price minus the tax, or plus the subsidy.
5. Tax revenue or subsidy cost = amount per unit × new quantity.
6. Split the burden or benefit: consumers = change in market price × new quantity; producers = the remainder.

Reminder (illustrative): Qd = 120 − 6P, Qs = −30 + 9P, tax 3. New equilibrium P = 11.8, Q = 49.2. Revenue = 147.6. Consumers pay 1.8 more per unit and producers keep 1.2 less per unit.

Key formulas

Item	Formula
Shortage	Qd − Qs at the maximum price
Surplus	Qs − Qd at the minimum price
Cost of buying a surplus	Surplus × minimum price
Tax revenue	Tax per unit × quantity sold after tax
Subsidy cost	Subsidy per unit × quantity sold after subsidy
Price received by producer (tax)	Consumer price − tax
Price received by producer (subsidy)	Consumer price + subsidy
Percentage change	(new − old) ÷ old × 100
Items affordable	Budget ÷ cost per item

Other measures

• Regulation: laws and rules (pollution limits, safety standards, age limits). Direct and can ban harm, but costs of compliance and enforcement; weak enforcement fails.
• Privatisation: public to private ownership. Possible gains: efficiency, competition, sale proceeds. Possible losses: unprofitable services cut, higher prices, private monopoly.
• Nationalisation: private to public ownership. Possible gains: protects essential services, no private monopoly. Possible losses: taxpayer funds losses, less cost pressure.
• Direct provision: government supplies the good, funded by taxes. Suits public goods (no one can be excluded) and merit goods. Cost: opportunity cost, possible waste, tax burden.

Must-know distinctions

Pair	Difference
Maximum vs minimum price	Cap below equilibrium (shortage) vs floor above equilibrium (surplus)
Tax vs subsidy	Supply shifts left vs right; government gains vs spends
Privatisation vs nationalisation	Public to private vs private to public
Regulation vs taxation	Rule that forbids or limits vs price signal that discourages
Direct provision vs subsidy	Government produces vs government pays private producers
Specific vs ad valorem tax	Fixed amount per unit vs percentage of price

Evaluating effectiveness

Use a short chain: measure, how it works, intended result, side effect, judgement.

• A tax on a demerit good works only if demand is responsive. If buyers barely cut back, it raises revenue but not much behaviour change.
• A subsidy lowers the price to buyers, but costs taxpayers and can keep inefficient firms alive.
• A maximum price helps those who can buy, yet shortage and black markets can leave others worse off.
• A minimum wage raises pay for those in work and may cut jobs; the size of the job loss depends on how responsive labour demand is.
• Direct provision guarantees supply but depends on the government’s information and the quality of its management.
• Government failure: intervention can itself misallocate resources.
• Finish with a judgement that names a condition: “This works best when…”.

Quick self-test

1. Define the mixed economic system.
2. Qd = 80 − 2P and Qs = −10 + 4P. Find equilibrium price and quantity.
3. A maximum price of 12 is imposed in that market. State the size of the shortage.
4. A minimum price of 18 is imposed. State the surplus and the cost to a government that buys all of it.
5. A specific tax of 4 per unit is imposed on another good and 30 units are sold after the tax. Find the revenue.
6. In that market the price rises from 15 to 16.5 after the tax of 4. What share of the tax do consumers pay?
7. A subsidy of 2 per unit is paid on 70 units. State the cost.
8. A central bank holds its currency at a floor price, so 50 million units are in excess supply at a price of 3. How much foreign currency does it spend?
9. A price rises from 20 to 23. Calculate the percentage increase.
10. Give two possible drawbacks of privatisation.
11. Explain why a minimum wage can cause unemployment.
12. A budget of 90 buys clinics costing 1.5 each. How many can it fund?

Answers

1. An economic system in which resources are allocated partly by the private sector through markets and partly by the public sector through government.
2. 80 − 2P = −10 + 4P, so 90 = 6P. P = 15, Q = 50.
3. Qd = 80 − 24 = 56 and Qs = −10 + 48 = 38. Shortage = 18.
4. Qd = 80 − 36 = 44 and Qs = −10 + 72 = 62. Surplus = 18, cost = 18 × 18 = 324.
5. 4 × 30 = 120.
6. 1.5 ÷ 4 = 0.375, so 37.5% (producers pay 62.5%).
7. 2 × 70 = 140.
8. 50 × 3 = 150 million units of foreign currency.
9. (23 − 20) ÷ 20 × 100 = 15%.
10. Any two: unprofitable services cut; prices raised; private monopoly power; loss of public control.
11. The wage is held above equilibrium, so firms demand fewer workers while more people supply labour. Supply exceeds demand, giving unemployment.
12. 90 ÷ 1.5 = 60.

Where marks are usually lost

• Drawing a control on the wrong side of equilibrium, so it has no effect.
• Writing “surplus” for a maximum price or “shortage” for a minimum price.
• Moving the demand curve for a tax or subsidy.
• Using the original price instead of the new price when working out revenue or cost.
• Stating that consumers pay the whole tax without checking elasticity.
• Not labelling axes, curves, the original and new equilibrium and the controlled price.
• Describing a measure without saying whether it works and why.
• Forgetting opportunity cost or who pays.
• Confusing nationalisation with privatisation.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, Cambridge University Press & Assessment (Cambridge International), version 2, section 2.11.