Features, Advantages and Disadvantages of Mixed economy

By | July 13, 2013

1.1.1 Features of mixed economy

Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. According to William M. Pride, Robert J. Hughes and Jack R. Kapoo (2010)

The basic plan of the mixed economy is that the means of production are mainly under private ownership; that markets remain the dominant form of economic coordination; and that profit-seeking enterprises and the accumulation of capital would remain the fundamental driving force behind economic activity. However, the government would wield considerable indirect influence over the economy through fiscal and monetary policies designed to counteract economic downturns and promote social welfare (Pollin 2007).

1.1.2 Advantages of mixed economy

Mixed-economy

1.1.2.1 Promote efficiency in both the private sector and the public sector

One advantage of the mixed economy model is that it promote efficiency in both the private sector and the public sector. On one hand, because the private ownership is still well protected and private sector is still dominating the economy, therefore the advantages of the market economy such as efficiency resource allocation and customer demand orientated production would be maintained; and on the other hand, when there should be any market irregularities and obvious risks, the government could intervene and keep a good order of market to avoid market failures such as financial crisis in which some large market players were knowingly contributing to the economic bubbles because they were benefiting from creating such bubbles. In this way, both the private sector and public sector are functioning and helping the national economy to develop in an efficient but well managed way which would promote overall efficiency.

1.1.2.2 Better handling of economic crisis

As in a market economy, each financial institution may have been behaving optimally on an individual basis, but the firms have no incentive to take into account the effect of their actions on the system as a whole. In economics, we call this a negative externality and it is analogous to an industrial firm causing pollution. For example, the financial failure of one bank would increase the possibility of runs on other banks, leading to the system-wide collapse (bigthink.com 2011). Though we do not see that the governments proactively prevent the happening of the economic crisis, we from the recent US led economic crisis, we can judge that the preventive and timely policies of the government in term of expansionary monetary policy and ambitious government fiscal plans as well as emergent handling such as bailouts and enactment of special regulations all suggest that the government provide better handling of the economic crisis compared to the market itself which could be seen from the previous handling of the crisis in the US history in the last century.

1.1.3 Disadvantages mixed economy

Some disadvantages could happen in a mixed economy if the two different frameworks operate and function at the same time. For example, it would be inefficient if the both forces do act against each other and also it would be difficult to judge which forces should play the major role under certain circumstances.

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