A mixed economy is a type of economic system which shares the elements/properties of both market economy and command economy. Nearly all of the economic systems prevailing in the world are based on the mixed economy system. To better understand the concept of mixed economy we have to know what is a market economy and command economy.
A market economy is one that is totally controlled by the invisible hand of market forces i.e. supply and demand, in order to answer basic questions like what to produce, how to produce, and for whom to produce. There is no government intervention.
In such a type of economic system, the government holds complete control on production, supply, employment, demand, ownership of land and capital, etc.
For example, the United States, the United Kingdom, Sweden, Iceland, France, and Germany, etc. are the developed countries that have mixed economic systems. Most of the underdeveloped nations of the world also have mixed economic systems prevailing there.
Advantages and Disadvantages of Mixed Economy
Since a mixed economy blends the good features of both a market economy and a command economy, it is the most popular because:
- It lets the market forces determine the question of allocation of resources for the most part without letting anyone too big to be able to exploit the consumers or employees.
- It enables the government to enact legislation and promulgate regulations to make the companies pay for negative externalities of their decisions thereby saving the mankind from ecological disaster and other negative implications.
- It gives the government tooth and nail (in the form of anti-trust laws) to stop companies from monopolizing industries; and in some cases, even break up companies to encourage competition.
- It entitles governments to use tariffs and economic sanctions to encourage global well-being i.e. by punishing regimes/countries who have child labour, poor anti-money laundering and anti-terror financing frameworks, etc.
- It obligates governments to protect basic human rights of its citizens, i.e. their liberty, privacy, etc.
- It allows governments to raise taxes and adopt other policy measures to create a safety net for the economically-vulnerable and in a way redeem the income and wealth disparity.
- The mixed economy allows the government to use fiscal policy and monetary policy as a tool to dampen economic cycles.
Despite the significant flexibility allowed to both the private enterprises and government in a mixed economy, some disadvantages do creep in, for example: