What is a Mixed Economy?
A mixed economy is a mix of the centrally planned economy, i.e., socialism, and a free market economy, i.e., capitalism. Such an economy promotes private investment in economic activities such as production and distribution, but with some level of government interference and control. Thus, such economies witness the co-existence of the private and public sectors.
The majority of the countries in the world have a mixed economy. They try to inculcate the best features of both types of economies. The private sector enjoys the liberty to use capital as per their choice while the government implements blanket rules and regulations that guide the activities in the economy.
- What is a Mixed Economy?
- Characteristics of a Mixed Economy
- Advantages of a Mixed Economy
- Limitations of a Mixed Economy
Characteristics of a Mixed Economy
Private Ownership of Resources
Unlike command economies, private individuals can own economic resources that they can use for production and distribution in a mixed economy. They are allowed to create and build wealth. They can choose any occupation of their choice, earn money and consume anything, except a few things that are not permitted by law. Also, hierarchy is allowed, and one can pass his wealth to the next generations.
Active Involvement of the Government
The government actively participates in economic activities through state-owned enterprises in a mixed economy. These enterprises involve heavy capital expenditure, which is usually out of bounds for the private sector. They include heavy industries in sectors such as iron and steel, power generation and distribution, etc. The government also actively participates in social sectors such as education, public health and administration, rail and road networks, etc.
The government is also responsible for preparing short-term as well as long-term policies and plans for the economy. It formulates several policies, such as the taxation policy, monetary and fiscal policy, licensing, etc., to regulate the private sector. It ensures that the private sector abides by those policies, rules, and regulations. Moreover, it may also provide support, encouragement and incentives, subsidies, and boosters to the private sector, keeping in mind the priorities of the nation.
A Mix of Profit Maximization and Social Welfare
A mixed economy works on the principle of profit maximization along with the promotion of social welfare. While the private sector owns enterprises with an ultimate motive to make profits, the government works to promote the welfare of society as a whole. The government also intends to make profits in the process, but it is its secondary objective. Nowadays, the big private sector players set aside funds for their CSR activities (Corporate Social Responsibility) to promote public welfare and add some value to society.
Most of the sectors of a mixed economy set prices according to the equilibrium of the demand and supply. The market forces are free to interact among themselves and arrive at an equilibrium price point. This ensures that the markets are fully efficient and the scarce resources of the economy are put to their best possible use.
However, the government may interfere in some sectors and administer the prices to protect the interests of some classes. They may put a price ceiling in place to prevent overcharging by the private players. Also, they may provide subsidies to the weaker sections of society to promote equality and affordability in society. In such cases, the government offers a few items of necessity either free of cost or at prices below the market price to the masses. It bears the gap between the actual market price and the selling price itself.
Advantages of a Mixed Economy
Autonomy and Efficiency
A mixed economy provides a fair level of autonomy to the private players. People enjoy freedom in choosing what to produce, how to produce, and for whom to produce. This encourages them to work most efficiently, increase their productivity and maximize their profits and wealth. There is no wastage of the scarce resources of the economy.
Equitable Distribution of Income
The government has a controlling hand in a mixed economy. It ensures equitable distribution of income in society through its policies of taxation and subsidies. It deploys various programs to provide free education and employment to the underprivileged class of society. The income disparity between the rich and the poor in the society is kept under check and not allowed to widen.
Fair Competition and Pricing
The freedom of enterprise and a fair amount of government control ensure fair competition and market pricing. Suppliers cannot overcharge due to competition. Also, the producers cannot engage in predatory pricing. The public sector enterprises are already in control of the government and ensure fair and just pricing of the essentials in the economy, such as power, transportation services, etc.
Attention to Every Sector
There are a few sectors that involve heavy capital expenditure to set up. Private individuals may not be able to meet such heavy investments. Also, the private sector may be unwilling to invest in a few sectors that offer limited or delayed returns, such as power generation, distribution, and railways.
Then there are crucial sectors such as defense which the government will not want to open up to the private sector fully. A mixed economy helps to address all these problems. The government may opt for the PPP model (Public- Private Partnerships), collaborate with efficient private industries, and work on big projects such as the development of transportation networks, SEZs, etc. with them. This results in an optimum mix of efficiency and high productivity levels in the private sector along with control and social welfare objectives of the public sector.
Limitations of a Mixed Economy
A mixed economy may sometimes result in operational inefficiencies as compared to open market economies. The government may put in place rigid policies of licensing, tariffs, quotas, and price controls which may hamper the free working of the private sector participants. The curb on freedom will affect their productivity and efficiency levels, resulting in ineffective utilization of resources.
A mixed economy sometimes promotes activities of lobbying and bribery of officials by powerful private players. They may try to bribe government officials to get laws and decisions passed in their favor and enjoy undue benefits. This may prove detrimental to society and go against the objective of achieving equality and social welfare.
A mixed economy is by far the best economic system in the world. The majority of the more significant nations, such as the United States of America, France, the United Kingdom, and India, have this form of economy. It helps the countries to provide the right levels of freedom to the private sector, coupled with adequate control measures by the government. As a result, economies can make the best possible use of the available resources and profit from them while promoting social welfare alongside.
- Capitalist Economy – Meaning, Features, Pros, Cons, and Types
- Free Market Economy – Meaning, Features, Advantages, and Limitations
- Two Sector Model – Meaning, Assumptions, Diagram and Drawbacks
- Circular-Flow Diagram Model
- Four Sector Model – Meaning, Assumptions, and More
- Three Sector Model: Meaning, Assumptions, and Diagram