The mixed economy and externalities (1.1.5-1.1.6)

Pearson Edexcel International GCSE in Economics (4EC1), specification Issue 3, February 2026. This topic covers spec sections 1.1.5–1.1.6 in full: the mixed economy (11 lettered rows) and externalities (5 rows). The externality diagram reuses the shared model (demand $Q_d = 140 - 2P$, supply $Q_s = 20 + 4P$) with an external cost of 6 per unit.

Must-know for this topic:

A mixed economy 混合经济 contains both a private sector and a public sector (1.1.5a–b). The private sector 私营部门 is owned and controlled by individuals and firms aiming (mostly) for profit; the public sector 公共部门 is owned and controlled by the state, aiming at welfare and service provision — the difference is ownership, control and aims (1.1.5c). The three questions (WHAT to produce, HOW to produce and FOR WHOM) are answered by BOTH mechanisms in a mixed economy: prices and profit signal the market part; government directs resources to health, education and public goods (1.1.5d).

Market failure 市场失灵 is the inefficient allocation of resources — the market produces too much or too little of a good compared with the social optimum (1.1.5e); because of it governments intervene — to correct externalities, provide public goods, and protect consumers (1.1.5f). Public goods 公共物品 are non-excludable (no one can be stopped from using them) and non-rival (one person's use does not reduce another's) — street lighting, flood defence. Non-excludability creates the FREE-RIDER problem: no one pays, so no private firm supplies them, so the public sector must (1.1.5g). Both sectors produce goods and services (1.1.5h); their relative importance differs across economies — Cuba against the USA against Sweden (1.1.5i). Privatisation 私有化 is the transfer of ownership from the public to the private sector (1.1.5j); its effects on consumers (lower prices if efficiency is passed on, but higher if a monopoly results), workers (job losses from efficiency drives), businesses (new profit opportunities) and government (a one-off sale receipt, then lost dividends and possible subsidy savings) (1.1.5k).

External costs 外部成本 of production are costs falling on THIRD PARTIES, not on the producer or consumer — pollution, congestion, environmental damage (1.1.6a–b). External benefits 外部收益 of consumption are benefits falling on third parties — education, healthcare, vaccinations (1.1.6c–d). The formulae (1.1.6e): SOCIAL COST = PRIVATE COST + EXTERNAL COST; SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT. Worked model: with demand $Q_d = 140 - 2P$ (marginal private benefit) and supply $Q_s = 20 + 4P$ (marginal private cost), the market trades at $(100, 20)$; if production carries an external cost of 6 per unit, the social optimum sits at $(92, 24)$ — the market OVER-PRODUCES by 8 units because buyers and sellers never see the externality.

Extract. Single-use plastic bags are cheap to make and are given away free in many shops, but used bags block drains, harm wildlife and can stay in the environment for hundreds of years. In October 2015 the UK government required large shops in England to charge 5p for each single-use bag. In 2014 the seven largest supermarkets had handed out about 7.6 billion bags. By 2021 their sales of single-use bags had fallen by about 97%. In May 2021 the charge rose to 10p and was extended to all shops. Shops were asked to give the money raised to good causes. Some shoppers switched to thicker "bags for life", which use more plastic per bag.

Questions

• (a) Define external cost. [2]
• (b) Calculate the approximate number of single-use bags handed out by the seven largest supermarkets after a 97% fall from 7.6 billion. [2]
• (c) Explain why a free market produces too many plastic bags. You may use a diagram. [4]
• (d) Explain one advantage of a charge compared with a complete ban on plastic bags. [3]
• (e) Evaluate whether a charge is the best way to reduce plastic waste. [9]

Model answers

(a) An external cost is a cost of producing or consuming a good that falls on a third party, someone not involved in buying or selling it, and that is not paid by the buyer or seller.

(b) $7.6 \text{ billion} \times (1 - 0.97) = 7.6 \times 0.03 = 0.228$ billion, about 228 million bags a year.

(c) Shops and shoppers consider only their private costs and benefits. The damage to drains, wildlife and the environment falls on third parties, so social cost (private cost + external cost) is greater than private cost. On the diagram above, the market trades where demand meets private cost, at a higher quantity than the social optimum, where social benefit equals social cost. Too many bags are produced and used.

(d) A charge still lets people who really need a bag buy one, while most shoppers bring their own: the bags go to those who value them most. A charge also raises money that can be used for good causes or for cleaning up. A ban gives no choice at all and may cause problems for shoppers who make unplanned trips.

(e) For the charge: it worked. Use fell by about 97%, far more than many expected, which shows that demand for free bags was very price elastic when a small price was added. It is cheap for the government to run, because shops collect the money. It makes the private cost closer to the social cost, so people pay for some of the damage they cause.

Against the charge: a 5p or 10p charge does not measure the true external cost, so it may be too low or too high. Some shoppers switched to "bags for life", which use more plastic, so total plastic may have fallen less than the number of bags. The charge is regressive in a small way, since 10p is a larger share of a low income. It does nothing about other plastic waste such as food packaging.

Other policies: a ban removes the bags completely but gives no choice and raises no money. Regulation of packaging, subsidies for recycling and reusable bags, and education campaigns can work alongside a charge.

Judgement: for plastic bags, a charge has been very effective at low cost, because a small price changed habits. It is not enough on its own to reduce plastic waste in general: it should be combined with rules on packaging and support for recycling, and the charge should be checked so that "bags for life" do not simply replace thin bags.

What examiners reward: a definition that names the third party, a correct calculation with units, an externality diagram with labelled private and social curves, and an evaluation that uses the extract's numbers and ends with a judgement.

• Mixed economy definition; public and private sectors; ownership, control and aims (1.1.5a–c).
• The three questions answered by both mechanisms (1.1.5d).
• Market failure as inefficient allocation; why it forces intervention (1.1.5e–f).
• Public goods: non-excludability, non-rivalry, the free-rider problem and non-provision (1.1.5g).
• Both sectors produce; relative importance differs by economy (1.1.5h–i).
• Privatisation definition and its effects on consumers, workers, businesses, government (1.1.5j–k).
• External costs with three examples; external benefits with three examples (1.1.6a–d).
• The two social-cost/benefit formulae with the (100, 20) → (92, 24) worked model (1.1.6e).

Boundary notes: definitions carry one mark each — non-excludable, non-rival, free-rider and privatisation are the most examined. Diagram marks want MSC/MSB curves labelled and the over-production gap identified. All worked numbers are original on the shared model.