Characteristics of a Mixed Economic System
- Any economic system needs to decide how to answer the three fundamental economic questions (see: 2.2.1 The (Free) Market System)
- What to produce? More weapons for the military or more schools to educate the children?
- Who to produce for? Only those who can afford to pay for it? Or for everyone in society?
- How to produce it? Should more labour be used or should the economy focus on using technology instead?
- A mixed economic system is a blend of a market & planned economy
- Individuals, firms & the government own factors of production & distribute goods/services
- In reality, almost every country in the world operates as a mixed economic system
- Some countries have more government intervention than others e.g. China has more intervention than the USA
- The higher the level of government intervention, the more the economy will lean towards operating like a planned economy
- Governments intervention is necessary for several reasons
A diagram showing several reasons for government intervention in mixed economic systems
- To correct market failure: in many markets there is a less than optimal allocation of resources from society's point of view
- In maximising their self-interest, firms & individuals will not self-correct this misallocation of resources & there is a role for the government
- Governments often achieve this by influencing the level of production or consumption
- Earn government revenue: governments need money to provide essential services, public and merit goods
- Revenue is raised through intervention such as taxation, privatisation, sale of licenses (e.g. 5G licenses), & the sale of goods/services
- Revenue is raised through intervention such as taxation, privatisation, sale of licenses (e.g. 5G licenses), & the sale of goods/services
- Promote equity: to reduce the opportunity gap between the rich & poor
- Support firms: in a global economy, governments choose to support key industries so as to help them remain competitive
- Support poorer households: poverty has multiple impacts on both the individual & the economy
- Intervention seeks to redistribute income (tax the rich & give to the poor) so as to reduce the impact of poverty
- As we have seen in 2.10.3 Government Intervention to Address Market Failure, four of the most commonly used methods to intervene in markets are indirect taxation, subsidies, maximum prices, & minimum prices
- Additional methods of intervention include regulation, nationalisation, privatisation, & the State provision of public goods
