Mixed economy - concept, features, characteristics, pros and cons

Mixed economy is a type of economic organization of society that combines elements of a market and command economy. Most modern economic systems are mixed.

To understand the essence of a mixed economy, you must first understand what market and command economies are.

A market economy is a method of economic organization in which economic decisions are made through the interaction of supply and demand, and the role of government is that of an outside observer who simply makes sure that no one breaks the rules.

On the other hand, in a command economy, the state is everything: the producer of all goods, the owner of all means of production (land and capital), the employer of all people, and the general manager of all enterprises.

Basic concept

A mixed economy is a system in which private producers and state-owned enterprises work in tandem in the economy. In a mixed system, individuals, businesses and corporations are allowed to pursue their best interests in the market, while government or public programs, organizations and businesses are equally allowed to provide services, etc. in the market, as well as intervene in areas such as trade or taxes.

However, a mixed system is not the same as a restricted economy because the government competes for limited resources in the market and can control and sanction corporations or private sector businesses. In addition, this system does monitor profit levels and may interfere with resource allocation.

According to neoclassical theory, it is less efficient than purely free markets. But proponents of government intervention argue that the basic conditions necessary for efficiency in free markets (equal information and rational market participants) cannot be achieved in practice.

Most modern economies have a synthesis of two or more economic systems. The public sector works alongside the private sector, but may compete for the same limited resources. Mixed economic systems do not block the private sector from making profits, but they regulate business and can nationalize industries that provide public goods.

For example, Russia's economy is a mixed economy in that it leaves ownership of the means of production largely in private hands, but includes such elements as subsidies for agriculture, regulation of production, and partial or full government ownership of some industries such as letter delivery and national defense.

Virtually all known historical and modern economies lie somewhere on the continuum of mixed systems. Both pure socialism and pure free market are only theoretical models.

Market monopolization

Market monopolization is a situation when one of the sellers or buyers accounts for such a large share of the total volume of sales or purchases in a particular product market that he can influence the formation of prices and terms of transactions to a greater extent than other participants in this market.
The market mechanism itself cannot prevent one or another firm from occupying a dominant position in the market for a particular product. Moreover, such a position of the company can be achieved due to either economic advantage, or various conspiracies or the destruction of competitors. Monopolization of the market due to the economic advantage of a particular company can arise if this company was able to offer customers the most favorable price-quality ratio for its goods. The basis for such an advantage is usually the introduction of more advanced production technologies or methods of organizing the production and marketing of goods.

If the result of such a company’s activities is the capture of an overwhelming share of the market, then there is nothing dangerous in this - after all, here the market mechanism successfully solves its main task: ensuring the best distribution of limited resources. Indeed, in such a situation, the largest share of resources goes to the firm that wins the competition through the best use of limited resources and, on this basis, achieving minimum costs or the highest quality.

Both are good for consumers, and therefore there is no reason for government intervention here. If such a firm tries to use its dominance in the market to inflate prices, it will thereby create conditions that allow other firms—even those with higher costs—to survive by offering lower prices to customers.

Monopolizing a market through collusion or the destruction of competitors is a completely different matter. This situation arises when the dominance of one or several firms in the market is not the result of better technology or production organization, but a consequence of the collusion of several largest firms among themselves, ousting other competitors from the market or absorbing them. In this case, the masters of the market are not necessarily the firms that ensure the most efficient use of limited resources, but simply the largest or the most skillful in destroying rivals. In this case, production resources are distributed worse than would happen in a non-monopolized market (they end up in the hands of not the most successful firms).

Characteristics of a mixed economy

This system has some features and characteristic features. Main features of a mixed economy:

1. Coexistence of private and public sectors. Certain industries are in the public sector and some industries are in the private sector. Individual entrepreneurs and firms own private sector industries.
2. Profit is the main motive of private sector industries. In the public sector, industries are owned and operated by the government. Public industries will have a profit motive, but also to promote social welfare.
3. Complete economic freedom. This means that the consumer is free to buy any product he likes.
4. Private property is permitted. However, it must be remembered that there must be an equal optimal distribution of wealth and income. It is necessary to ensure that profits and assets are not concentrated in a few pockets.
5. Planned Economy. The entire economic structure is subject to planning by the government. The commission solves problems, distributes resources, etc.
6. Testing economic inequality. In this system, the government takes several measures to reduce the gap between rich and poor through progressive taxation of income and wealth. Subsidies are provided to the poor as well as employment opportunities. Other measures such as old age pension, free health care and education are also being taken to improve the standard of living of the poor people. Consequently, all of this helps reduce economic inequality.
7. Control over monopolies. Under this system, the government is taking huge initiatives to control monopolistic practices among private entrepreneurs through effective legislative measures.

Example

The United States is a good example of a mixed economy. On the one hand, it allows and enforces all private property rights such as patents, copyrights, and so on.

On the other hand, it is the necessary environment, social security and antitrust laws to ensure a level playing field.

Advantages and disadvantages

While there are certainly many proponents of this type of economic system (and the many benefits it provides), there are also critics. Pros and cons of a mixed economy:

1. One of the obvious advantages is that the market economy aspect allows the prices of goods to be determined based on supply and demand. In addition, resources, goods and services are directed to where they are most useful.
2. Another advantage of this system is its capitalist approach to rewarding the hardest working or most efficient enterprises in the market. By providing a pseudo-free market, the mixed system allows the producers with the highest profits to rise to the top and continue to produce and generate capital, which in turn gives consumers better prices.
3. By allowing competition, it also promotes the creation and development of an environment of innovation and efficiency, forcing companies to compete to produce a variety of better products or services for consumers, which in turn will benefit both consumers and the market. Thus, the most efficient producers are those that generate profits and capital to continue to create and implement cost-effective ways to meet consumer needs.
4. Another huge advantage is that this system remains focused on areas such as aerospace, defense and technology that may be neglected by a market economy. Thus, the role of the government in a mixed economy is to effectively develop products and programs in these areas, allowing private enterprises to focus on many other sectors.
5. A stronger government presence in the economy ensures that small businesses are not left out of competition by large conglomerates and prevents widespread monopolies that can create barriers to entry into certain markets.

However, according to economists, the mixed system is by no means ideal. Along with numerous advantages, there are also disadvantages:

1. Although the government often petitions small companies to fight competition, this is not always effective, and the cleaner aspects of a market economy can make it more difficult for producers to compete if they are not among the most successful.
2. Limited government intervention can harm producers, as can too much influence. Some argue that a mixed system allows the government to monopolize certain industries (such as defense) while government-subsidized manufacturers are essentially in charge of that sector, which could create more debt for the country and slow economic progress.
3. Another important problem is that the mixed model is dominated by government protections such as tax breaks or subsidies, or perhaps the most controversial of all bailouts. Some large corporations may receive special treatment from the government, which may disrupt the natural flow of the economy.

The occurrence of externalities or external costs

External (side) effects are damage (or benefit) from the production of any good that has to be borne (or can be received) by people or firms not directly involved in the purchase and sale of this good.
This situation is typical, for example, for industries that pollute the environment. A chemical plant pollutes the surrounding area through atmospheric emissions, and this makes children in a nearby town sick. This does not concern the management of the plant, but the parents of these children are very concerned - they would like the plant to install powerful treatment facilities and stop polluting the air.

However, the residents of this city are in no way involved in the management of the plant or the formation of prices for its products. Consequently, within the framework of standard commercial procedures, their interest cannot be taken into account by the market. Buyers of chemical products are also not interested in additional costs for air purification, since this will increase the price of the goods they buy.

As a result, air pollution over residential areas turns out to be an “external” effect, extraneous to the chemical products market, and therefore is not taken into account in the formation of prices on it. This, naturally, angers the residents of the affected city, and they begin to demand that the government “put things in order” and take their interests into account, i.e. force him to intervene in normal market processes.

If the pollution of fields by atmospheric emissions from industry is an example of a negative externality, then the improvement of street lighting in the evening due to advertising and store windows is an example of a positive externality. But this effect does not in any way affect the relationship between store owners and customers. This means that it also cannot be taken into account by the market when regulating the distribution of limited resources (in this case, resources used to produce goods that are sold in stores with well-lit display windows and illuminated advertising).

In other words, the external (side) effects of certain types of economic activity for society as a whole may be of great importance, but are not taken into account by the market and therefore cannot influence how it distributes limited resources. If market decisions are made without taking into account all the costs and benefits associated with the production and consumption of a certain type of goods, then these decisions are far from perfect. Moreover, underestimating externalities means ignoring the losses or benefits of some groups of citizens or firms, and this can give rise to social conflicts.

That is why the state is forced to intervene in solving the problem of external effects of economic activity, compensating for the imperfections of the market, its inability to take such effects into account and find the best solutions for such situations.

Features and differences

Many economic systems use different aspects of markets and government—whether full government intervention or free market processes. The comparison of systems can be summarized as follows:

1. Market. While a mixed system combines a free market with central government planning and intervention, a market system relies solely on the free market (and the rules of supply and demand) to regulate the economy. For this reason, profit motives, incentives and capitalism are the driving factors of the economy. Examples of market economies include New Zealand and Switzerland.
2. Command and administrative. A command economy is governed solely by government regulation, determining the prices, producers, and resources of goods. For this reason, unlike a mixed economic system, there is practically no competition in a team economic system. An example is North Korea and Cuba, which identify themselves as communist countries and control most (if not all) economic activity.
3. Traditional. Although much less common than mixed or market economies, traditional economies are systems whose functions rely on custom and tradition to determine economic activities such as barter and agriculture and fundraising. Most traditional economies in 2022 can be found in emerging markets or states such as those in Africa or the Middle East. Traditional economics often focuses on production and distribution in terms of what is needed (and often does not create a surplus of goods). For these reasons, it has been largely replaced by mixed or market systems in the world's major economic powers.

Table comparing characteristics of different economic systems.

Comparison criteria.	Market system.	Traditional system.	Command system.
Manufactured goods.	In-demand products.	Production problems are solved according to established traditions.	Benefits for the whole society.
Consumers.		For the consumer of a specific product.	For consumer diversity.
Mode of production.		The entrepreneur decides, focusing on making a profit.	Only the central authorities in the state decide.
Ownership.	Society.	Private ownership predominates, with state and group ownership present.	State ownership predominates.
The role of the state in the economy.	There is no state yet or its role is to preserve traditions.	The role of “night watchman” is assigned to protect the borders of the state and law and order within the country.	All defining issues are resolved at the state level.

A striking example

One of the most striking examples of a mixed system is the United States. As detailed in the Constitution, the country's early history developed an economic system that protected property rights and prevented government interference in business practices.

The US continues to adhere to this economic system, and according to the index, the economic freedom indicator is 75.7, which is the 17th most free indicator in the 2022 index.

America operates a mixed economy, having a large private sector and a free market that allows for ample competition and uses efficiency and innovation to produce products, as well as central government planning in certain areas such as health care or corporate taxation (among other options) and trade administration. Other countries with mixed economies are France and the UK, which combine a mixture of government intervention and free markets.