Mixed economy

economic-dictionary

The mixed economy is a system of economic organization in which the action of the private sector is combined with that of the public sector, which acts as a regulator and corrector of the former.

In a mixed economy, most economic decisions are resolved through the interaction of sellers and consumers in the market (law of supply and demand). However, the State has an essential complementary role.

Therefore, in this mixed system, most decisions are made by the private agents of the economy (households and companies), who decide what, how and where to produce. But at the same time, State action is also present, covering market failures, such as providing the population with public goods or redistributing wealth through taxes and subsidies to establish a more equitable society.

The mixed economy is a mixture of the two extremes of basic economic systems:

  • Capitalist economy
  • Planned economy

In the first case, the free market is the essential mechanism for solving the three basic questions of the economy (what, how and for whom to produce). In the second case, on the other hand, it is the State that centrally answers these questions. In this way and thanks to this combination of actors, the limitations of the two previous systems are reduced or corrected.

Role of the State in a mixed economy

In a mixed economy, the State has an essential role. Below we describe its main functions:

  • Legal framework: The State must create and ensure a framework of laws so that the market can function well. Thus, for example, it ensures the existence and defense of Private Property Rights, establishes channels for the resolution of disagreements, etc.
  • Regulation: The State intervenes when there are market failures that prevent an efficient result from being achieved. Thus, for example, when there are public goods such as national defense, the State is in charge of collecting resources and providing services. Regulation must follow certain principles to be efficient.
  • Improve income distribution: The State seeks to achieve a more equal distribution system or at least ensure a minimum so that people can survive.
  • It is responsible for the production of some goods and services: The State, either by itself or by contracting private companies, ensures the provision of some goods and services that are necessary for people but are not profitable for companies. For example, some governments are responsible for the provision of telephone services in isolated areas.
  • Market failures: These are situations where the market is not able to allocate resources efficiently (street lights, sewers, etc.)

Mixed economy example

In the 21st century, the vast majority of countries have a mixed economy, which may be closer to the market economy, or to the planned economy, but it will always have a bit of both.

An example of the mixed system is the so-called Welfare State. Under this system, most economic decisions are made in the market, but the State develops a set of activities in order to achieve some social and distributional objectives. In general, the State uses part of its budget to ensure that all citizens reach a minimum of resources to be able to live with dignity. These resources usually include: (i) health care, (ii) basic education, (iii) housing, (iv) food, and (v) money in periods of unemployment or old age.

The development of the mixed economy

After the Second World War and given the limitations presented by the two economic systems existing to date: the market economy system and centralized planning, a new system began to be applied in most of the Western European countries, the mixed economy system, which seeks to combine the advantages of the other two.

The mixed economy in the 21st century

Currently, most of the world's economies have opted for the mixed economy system. All combine elements typical of the two systems, although the degree of State intervention is very different in some than in others.

For example, in European economies, the role of the state tends to carry greater weight than in North America. On the other hand, in economies like China, which is considered planned, although the State is the main protagonist, in certain regions and sectors, market action is allowed. Consequently, you also end up combining elements of the two systems.

In general, we speak of market economies when we refer to those in which the action of market mechanisms predominates, and planned ones, those where the majority of economic decisions are based on state action; but in practice, all (or the vast majority) of existing economies combine elements of both and are therefore mixed economies.

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