Role of Government in the

mixed economy

RATNENDU DAS
SUBHAJYOTI MAJUMDER
PRATEETI MODAK
SUCHANDA BANERJEE
PUSHPITA GHOSH
 Definition of Economics
n Economics is the study of how
individuals/societies distribute scarce
resources for unlimited wants.

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 A Mixed Economic System
q A mixed economy is an that includes a variety of
private and government control, or a mixture of
capitalism and socialism.

q Economists usually describe an economy in which

private enterprise and governmental participation
coexist as a mixed economy.

q There is not one single definition for a mixed

economy, but relevant aspects include: a degree
of private economic freedom (including privately
owned industry) intermingled with centralized
economic planning and government regulation
(which may include regulation of the market for
environmental concerns, social welfare or
efficiency, or state ownership and management of
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some of the means of production for national or
 The Free Market Economy
In a free market economy, households and business firms use
markets to exchange money and products. Households own
the factors of production and consume goods and services.

q Market failures :
ØWould the free market ensure that roads are built
everywhere they are needed?
Ø It’s doubtful. Neither could individuals afford to pay for a
freeway.
ØA market failure is a situation in which the market, on its
own, does not distribute resources efficiently.
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 Essential Question

Click to edit Master text styles

Why do most Second level
countries have ● Third level

● Fourth level

a mixed ● Fifth level

economy?

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n What toppings
do you like on an
ice cream ?

– Plain Vanilla?

– Or absolutely
everything?

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n Chances are, you were somewhere between plain
and everything.

n When discussing economies, most countries are

somewhere in between too.

n When a country is not completely a command

economy and not completely a market economy,
but somewhere in between, it is called a Mixed
Economy.

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 “Pure” Command Economies
If government controlled everything in the economy,
then having a diversity of products would be very
difficult.

With no private businesses, there would be no

competition, and products would never improve.

The government could make the economy exploit the

poor and benefit the rich.

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 “Pure” Market Economies
If an economy was pure market, people could
sell anything, even things that could hurt others.

Businesses could make things cost as much as

they wanted.

In order to make products cheaper, they could

skimp on safety and benefits for workers.

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 Mixed Economy – “In Between”
All economies in the world today are mixed. There is
some government involvement in the economy.

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Most Countries Lie Somewhere in Between
-However, they may be closer to one
side than the other.

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 Government spending

The scale of government activity has grown steadily in

industrial countries since 1880

60
% of national income

50 Japan
40 USA
30 Germany
20 UK
France
10
Sweden
0
1880 1929 1960 2000

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 Comparing Mixed Economies
When studying different economic systems, it is best to view
them on a continuum, as depicted here. Where on the
continuum would you place the United States? Canada? North
Korea? What do you think is the most effective economic
system?
The degree of government involvement in the economy varies
among nations.

Continuum of Mixed Economics

Centrally Planned Free Market

Iran South Africa France UK Hong Kong

North Korea China Botswana Canada Singapore
Cuba Russia Greece Peru US
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What do governments do?
create laws, rules and regulations
buy and sell goods and services
make transfer payments
impose taxes
try to stabilize the economy
affect the allocation of resources

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What should governments do?
In a mixed economy:

The government purchases land, labor, and capital from

households in the factor marker and purchases goods
and services in the product market.

Governments may be justified in intervening in the

economy in the presence of market failure

Six ways in which intervention may improve the

allocation of resources:
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What should governments do?
(1) The business cycle
decisions on taxation and spending may affect the
business cycle
not always favourably
(2)Public goods
goods that, even if consumed by one person, are still
available for consumption by others – e.g. clean air
the free-rider problem prevents the market from achieving
production of the “right” amount of such goods.

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What should governments do?
(3)Externalities
costs and benefits of production are not always
reflected in market prices
● e.g. pollution, congestion.
(4)Information-related problems
private markets may not produce the “right”
kinds and amounts of information
● e.g. food labelling, health and safety
regulations.
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What should governments do?
(5)Monopoly and market power
resource allocation may be improved by limiting or
regulating the market power of monopoly firms
(6)Income redistribution and merit goods
concern with equity issues
● e.g. protecting vulnerable groups
merit goods are goods that society thinks people
should consume regardless of income
● e.g. health, education
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 Who pays a commodity tax?
With no tax, market
S'
equilibrium is at P0, Q0
Price

S With the tax, supply is S'S'

P1 and equilibrium is P1Q1

P0
S' …but who pays the tax?

S
D
Q1Q0 Quantity
194.19
 Who pays a commodity tax?
S' Area A is borne
by consumers
A S Area B is borne
by producers
P1
Area C is a
P0 welfare loss.
C
S'
B The incidence of the
tax depends upon the
S D elasticities of demand
and supply.
Q1Q0
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 Economic Role of Government
The Government Should
Provide the infrastructure for a market to function
efficiently
Ensure that competition flourishes
See that information flows freely
Protect property rights
Minimize unpleasant side effects such as pollution
The size of government depends largely on how well
private enterprise does the job of efficiently
allocating resources
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 Government Action on
External Costs and Benefits
If you are doing something that provides external benefits
the government may provide you with a subsidy to
encourage you to continue
For example, the government subsidizes farmers to help
keep them from going out of business
If you are incurring external costs
The government can tax you to encourage you to
discontinue or change what you are doing
The government can impose stringent regulations and
impose heavy fines for noncompliance

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 Example

In the recent budget, Government of India has

intervened in the fertilizer sector. Government
has announced a Nutrient based subsidy in the
fertilizer sector. Subsidy has promoted a
balanced fertilization through new fortified
products and focus on extension services by the
fertilizer industry. This will lead to an increase in
agricultural productivity and constituently better
returns for the farmers.

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THANK YOU