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

This guide is written for the Cambridge IGCSE Economics (0455) syllabus for examination in 2026. It covers section 2.11, the mixed economic system, which has two parts: 2.11.1 (the definition) and 2.11.2 (government intervention to address market failure). The syllabus is not tiered, so every candidate meets all of it. It builds on the allocation of resources guide, which covers the market economic system and market failure. Every number below is invented and labelled as illustrative.

Other pages for this unit: revision notes and practice questions. Course links: Cambridge IGCSE Economics hub, printable checklist and free 10-minute diagnostics. For earlier ideas, see the allocation of resources revision notes and allocation of resources practice.

What you must be able to do

Section	Official focus	What it means for you
2.11.1	Definition of the mixed economic system	Define it and say who decides what
2.11.2	Maximum and minimum prices in product, labour and foreign exchange markets	Define, draw and interpret diagrams
2.11.2	Indirect taxation and subsidies	Define, draw and interpret diagrams
2.11.2	Regulation, privatisation, nationalisation, direct provision	Explain the implications
2.11.2	Effectiveness of intervention	Judge how well each measure fixes the drawbacks of a market system

The syllabus note under market failure (2.10) says demand and supply diagrams about market failure itself are not required. In 2.11 the diagrams of the three price and tax measures are required, so practise them.

2.11.1 The mixed economic system

A mixed economic system is one in which resources are allocated partly by the private sector, through markets and the price mechanism, and partly by the public sector, through government decisions. Households and private firms make most decisions about what to buy and sell. The government steps in where markets give poor results.

A market system can fail in the ways you met in 2.10: public goods are not supplied, merit goods are under-consumed, demerit goods and goods with external costs are over-consumed, monopolies abuse power and factors are immobile. The government has several tools to respond. That is why most economies are mixed, with the balance between the sectors differing by country.

Maximum prices

A maximum price (price ceiling) is a legal limit above which a price may not rise. It only has an effect if it is set below the equilibrium price.

Worked example (rice, Country A, illustrative). Demand is Qd = 100 − 4P and supply is Qs = −20 + 8P, with price P in dollars per kilogram and quantity in thousand kilograms.

• Equilibrium: 100 − 4P = −20 + 8P, so 120 = 12P, so P = 10 and Q = 60.
• The government sets a maximum price of 7.
• At 7: Qd = 100 − 28 = 72 and Qs = −20 + 56 = 36.
• Shortage = 72 − 36 = 36 thousand kilograms. Only 36 can be sold, because sellers will not supply more.

Price	Qd	Qs	Result
10 (equilibrium)	60	60	Market clears
7 (maximum)	72	36	Shortage of 36

On the diagram, draw a horizontal line at 7 below the equilibrium. Quantity demanded is read off the demand curve, quantity supplied off the supply curve, and the horizontal gap between them is the shortage.

Why governments do it: to make essentials affordable. Drawbacks: a shortage, queues or rationing, a risk of black markets where the good sells above the legal price, and lower supply because producers earn less.

Minimum prices

A minimum price (price floor) is a legal limit below which a price may not fall. It only matters if it is set above equilibrium.

Worked example (a farm crop, Country B, illustrative). Qd = 120 − 4P and Qs = −40 + 12P.

• Equilibrium: 160 = 16P, so P = 10 and Q = 80.
• A minimum price of 12 is set. Qd = 120 − 48 = 72 and Qs = −40 + 144 = 104.
• Surplus = 104 − 72 = 32.
• If the government buys the surplus, it spends 32 × 12 = 384.

Consumers now pay more and buy less. Producers receive a higher price, so those who sell gain, but the surplus must be stored, destroyed, exported or bought by the government, and that has an opportunity cost.

Maximum and minimum prices in the labour market

In the labour market the price is the wage and the horizontal axis is the quantity of labour. Demand comes from firms and supply from workers. A minimum wage is a minimum price for labour.

Worked example (Country C, illustrative). Labour demand is Ld = 200 − 10W and labour supply is Ls = 20 + 10W, with W the hourly wage and labour in hundreds of workers.

• Equilibrium: 180 = 20W, so W = 9 and L = 110.
• Minimum wage set at 10: Ld = 100 and Ls = 120.
• Unemployment = 120 − 100 = 20 hundred, which is 2,000 workers.
• Employment falls from 110 to 100, a fall of 10 ÷ 110 = 9.1%.
• The 100 hundred (10,000) workers who keep jobs each gain 1 per hour. The 10 hundred (1,000) whose jobs disappear gain nothing.

The wage bill rises from 9 × 110 = 990 to 10 × 100 = 1,000, so total pay can go up even while employment falls. How large the job loss is depends on how responsive firms’ demand for labour is to the wage. A maximum wage is rare; it would sit below equilibrium and create a shortage of workers.

Maximum and minimum prices in the foreign exchange market

Here the “good” is a currency. The price is the exchange rate, measured as units of foreign currency per unit of the home currency. Demand comes from buyers of exports, foreign investors and tourists who need the home currency. Supply comes from residents buying imports and investing abroad.

Worked example (the zed, Country D, illustrative). Qd = 500 − 100P and Qs = 100 + 100P, with P in foreign units per zed and quantities in millions of zeds.

• Equilibrium: 400 = 200P, so P = 2 and Q = 300.
• Minimum price (floor) of 2.40 to keep the currency strong: Qd = 260 and Qs = 340, so 80 million zeds are in excess supply. The central bank must buy them, spending 80 × 2.40 = 192 million foreign units from its reserves.
• Maximum price (ceiling) of 1.60 to keep the currency cheap for exporters: Qd = 340 and Qs = 260, so excess demand is 80 million. The central bank must sell 80 million zeds, gaining 80 × 1.60 = 128 million foreign units.

A floor can only be held while reserves last. A ceiling means the central bank keeps creating and selling its own currency, which can raise the money supply.

Indirect taxation

An indirect tax is a tax on spending, collected by the seller and passed to the government (for example a tax per unit sold). A specific tax is a fixed amount per unit. Because it raises each unit’s cost, supply shifts upward (left) by the amount of the tax. The vertical gap between the old and new supply curves equals the tax.

Worked example (a fizzy drink, Country E, illustrative). Qd = 120 − 6P and Qs = −30 + 9P.

• Before tax: 150 = 15P, so P = 10 and Q = 60.
• A tax of 3 per unit changes supply to Qs = −30 + 9(P − 3) = −57 + 9P.
• After tax: 177 = 15P, so P = 11.8 and Q = 49.2.
• Consumers pay 1.8 more per unit. Producers receive 11.8 − 3 = 8.8, which is 1.2 less.
• Tax revenue = 3 × 49.2 = 147.6. Consumers bear 1.8 × 49.2 = 88.56 of it and producers 1.2 × 49.2 = 59.04.

The burden falls more on consumers when demand is less elastic. The tax cuts quantity from 60 to 49.2, an 18% fall, so it reduces consumption of a demerit good. The revenue can fund other services. An ad valorem tax takes a set percentage of the selling price, so the vertical gap between the supply curves widens as price rises.

Subsidies

A subsidy is a payment from the government to producers that lowers their costs per unit, shifting supply down (right) by the amount of the subsidy.

Worked example (bus travel, Country A, illustrative). Qd = 200 − 10P and Qs = −40 + 20P.

• Before: 240 = 30P, so P = 8 and Q = 120.
• A subsidy of 3 per unit changes supply to Qs = −40 + 20(P + 3) = 20 + 20P.
• After: 180 = 30P, so P = 6 and Q = 140.
• Consumers pay 2 less. Producers receive 6 + 3 = 9, which is 1 more.
• Cost to government = 3 × 140 = 420. Consumers gain 2 × 140 = 280 and producers 1 × 140 = 140.

Subsidies encourage consumption of goods with external benefits and merit goods, and can help infant industries. Their drawbacks are the opportunity cost of the funds, the risk that firms become dependent, and the difficulty of knowing how large the subsidy should be.

Regulation

Regulation means rules backed by law, such as limits on pollution, age limits on sales or standards for safety and advertising. It can be more direct than a tax: a ban on a harmful input stops its use, while a tax only discourages it. Implications: firms face compliance costs, which may raise prices; the government needs inspectors and penalties, which cost money; and rules that are weakly enforced achieve little.

Privatisation and nationalisation

Privatisation is the transfer of ownership of an asset or firm from the public sector to the private sector. Nationalisation is the transfer from private to public ownership.

	Possible benefits	Possible drawbacks
Privatisation	Profit motive and competition may raise efficiency; government gains sale proceeds and saves running costs	Firms may cut unprofitable services, raise prices or abuse monopoly power; loss of public control
Nationalisation	Can protect essential services, avoid private monopoly power, keep loss-making but needed services open	Taxpayers cover losses; less pressure to cut costs; political decisions may override sound ones

Direct provision of goods

In direct provision the government itself supplies a good or service, paid for from taxation and usually free or cheap at the point of use. This suits public goods, which private firms will not supply because people cannot be excluded, and merit goods such as education and health care.

Worked example (illustrative). A government has a budget of 120 for clinics costing 2.4 each, so it can build 120 ÷ 2.4 = 50. If it builds 40 clinics, it spends 96 and has 24 left. At 3.0 per school, the 24 would pay for 8 schools. Choosing 10 extra clinics therefore means 8 schools are given up, which is the opportunity cost.

Drawing the diagrams

Put price (or wage, or exchange rate) on the vertical axis and quantity on the horizontal axis. For a price control, draw a horizontal line at the controlled price and mark Qd and Qs where it meets each curve; the gap is the shortage or surplus. For a tax or subsidy, draw a second supply curve shifted vertically by the amount per unit, and label both equilibria and the prices consumers pay and producers receive.

Judging effectiveness

Intervention is effective when it moves the economy closer to the best use of resources at an acceptable cost. Ask these questions of any measure:

• Does it address the actual cause of the failure?
• What is the cost, and who pays?
• Are there unintended effects, such as shortages, surpluses, unemployment or black markets?
• Does the government have good enough information to set the right level? (Government failure arises when it does not.)
• How responsive are buyers and sellers? Taxes work best on goods where demand is elastic.
• What is the time lag, and is the measure fair?

A balanced answer gives a reasoned judgement: for example, a tax and a subsidy can work together, with the tax on a demerit good funding a subsidy for a merit good.

Common errors

• Drawing a maximum price above equilibrium, or a minimum price below it. Neither has any effect.
• Shifting demand instead of supply for a tax or subsidy.
• Saying consumers always pay the whole tax.
• Describing privatisation as “giving” a firm to workers rather than selling it to private owners.
• Forgetting opportunity cost when evaluating direct provision or a subsidy.
• Listing points without a judgement in an evaluation answer.

Official syllabus

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