MIXED ECONOMY

An economy is a system that attempts to solve the basic economic problem: decision makers in an
economy have to decide what to produce, how to produce and for whom to produce. In any economy,
goods and services may be provided by the public sector or the private sector.

In the private sector, individuals or groups of individuals are free to set up businesses and supply goods
and services to anyone who wants to buy them.

In the public sector, a range of organisations, such as government departments, public corporations and
other agencies, provide services that are often supplied inefficiently by the private sector. Examples
include health care, education and defence. Most public sector services are provided free by the state
and are paid for from tax revenue or borrowing.

PRIVATE SECTOR
 OWNERSHIP & CONTROL

• Sole traders

• Partnerships

• Companies

 AIMS/OBJECTIVES

• Profit

• Growth

• Survival

• Social responsibility

PUBLIC SECTOR

 OWNERSHIP & CONTROL

 Central government department
 Local authority services
 Other public sector organisations
 AIMS/OBJECTIVES
 Improving the quality and service
 Minimizing cost
 allowing social cost & benefit
 profit

TYPES OF ECONOMIES

1. Command economic system

In a command system, there is a dominant centralized authority – usually the government – that
controls a significant portion of the economic structure. Also known as a planned system, the
command economic system is common in communist societies since production decisions are the
preserve of the government.

2. Market economic system

Market economic systems are based on the concept of free markets. In other words, there is very
little government interference. The government exercises little control over resources, and it does
not interfere with important segments of the economy. Instead, regulation comes from the people
and the relationship between supply and demand.

3. Mixed system

Mixed systems combine the characteristics of the market and command economic systems. For this
reason, mixed systems are also known as dual systems. Sometimes the term is used to describe a
market system under strict regulatory control.

Many countries in the developed western hemisphere follow a mixed system. Most industries are
private, while the rest, composed primarily of public services, are under the control of the
government.

HOW MIXED ECONOMY SOLVES BASIC ECONOMIC PROBLEMS?

 WHAT TO PRODUCE?

A mixed economy recognises that some goods, such as consumer goods, are best provided by the
private sector. Goods such as food, clothes, leisure and entertainment, and household services are
best chosen by consumers. The market system ensures that businesses produce the consumer
goods that people want. Other goods, such as education, street lighting, roads and protection, are
more likely to be provided by the state. The public sector tends to provide goods that the private
sector might fail to provide in sufficient quantities. This is often caused by market failure.

 HOW TO PRODUCE?

In the private sector, individuals or groups of individuals who set up businesses with the aim of
making a profit provide goods. Competition exists between these firms and this provides choice and
variety for consumers. To meet consumers' needs, firms will use production methods that help them
to maximise quality and minimise costs. Public sector services will be provided by the government
organisations outlined above. They will decide how these services should be provided and attempt
to supply them efficiently. However, some public sector goods are produced by the private sector.
For example, governments are usually responsible for the provision of roads and motorways,
however, they may pay private sector businesses to carry out the actual work of construction and
maintenance.

 FOR WHOM TO PRODUCE?

The goods produced in the private sector are sold to anyone who can afford them. The market
system is responsible for their allocation. In contrast, most public sector goods are provided free to
everyone and paid for from taxes. In some mixed economies, the state also makes provision for
people who cannot work due to illness or disability, for example. A system of financial benefits exists
to make sure that people have enough money to survive.
MARKET FAILURE

If markets are working properly, the price of something will result from the differences between supply
and demand. So, a dysfunctional market would be one in which prices are unreasonable.

Types

Each cause of market failure triggers a specific type. Let’s check the most common ones below that
cause the market failure graph to fall beyond repair.
#1 – Missing Market

During imperialism, many colonizers forced the farmers to overproduce cash crops like cotton and
coffee when there were colonies. This created a shortage of land and resources to produce rice, wheat,
and sugar.

Many colonies suffered through adequate starvation as there was no proper market of essential food
commodities for people to purchase from. Many colonies, after seeking independence, restructured
their economy to become self-sufficient in food crops. This is an example of missing markets.

#2 – Monopoly

Monopoly

is one of the most common causes. If a single actor acquires all of the means of production in a market,
it will set prices as they wish because it will face no competition. Often, this company will set prices
much higher than they need because no one else can compete with them, so their rational decision will
be to profit more.

#3 – Externalities

Externalities and market failure are common. It happens when your consumption of a good affects an
uninvolved third party. In a positive example, someone else’s action helps you. For example, your
property’s value may arise if someone builds a luxury condominium near your house. However, if they
build a prison complex, the price will be negatively affected, resulting in a negative externality.

When governments spend too much money, for instance, they can trigger a negative externality and
market failure as the taxpayers end up paying more money for someone that will not benefit them in
the same way.

#4 – Unable to attain equal opportunities

When societies fail to allocate resources judiciously, a segment of the population thrives on abundance
over the taxpayers’ money while the needy struggle to meet basic needs. This causes a disequilibrium
between demand and supply.

#5 – Asymmetric Market Information

Another leading cause is asymmetric information

that happens when there’s not enough information to guide buyers and sellers of a good. Because the
participants are not well-informed, prices will not reflect the real value and may vary significantly
depending on where you buy them.

#6 – Others

Market speculation can also drive prices up and down without representing reality just as quickly. Public
goods like national defense are also a type of market failure. Not everybody pays for them (for instance,
avoid taxes), but everybody can use them. Finally, several factors, such as geographical unemployment
or climate change, can also contribute to such failures.

Examples

Let us understand the concept better with the help of a couple of examples that will help us grasp the
ebbs and flows of the market failure graph’s behavior better.

Example #1

XYZ Ltd produced customized stationary for their clients. Established in 1974, their company one of the
first organizations in the world to provide customized solutions for something as basic as stationary.

Therefore, they were able to price their products well beyond the market prices and attracted plenty of
corporate gifting and bulk orders.

As time passed on, their competitors picked up the same strategy and also used the advantage of
studying XYZ’s strategies to price their products way better. As a result, XYZ had to cut down their prices
and had to market the products around “customization is now affordable” brief.

Example #2

De Beers is a great example of a monopoly and how it can lead to a massive market failure. The South
African company controlled over 80% of the world’s rough-diamond production in 1902. As time passed,
De Beers’ strength only increased.

With aggressive marketing strategies and by controlling demand acutely, De Beers could use its
monopoly to efficiently raise the price of its product much further than it would without it.
The company made it highly difficult to gain access to supplies and markets for diamonds. As diamonds’
sales declined in the 1930s, De Beers started to push a marketing campaign to increase demand by
convincing people that buying a diamond for your fiancé was a romantic idea.