Characteristics of a Mixed Economic System (Cambridge (CIE) O Level Economics)

Characteristics of a Mixed Economic System

• Any economic system needs to decide how to answer the three fundamental economic questions (see: 2.2.1 The (Free) Market System)

  • What to produce? More weapons for the military or more schools to educate the children?

  • Who to produce for? Only those who can afford to pay for it? Or for everyone in society?

  • How to produce it? Should more labour be used or should the economy focus on using technology instead?

• A mixed economic system is a blend of a market and planned economy

  • Individuals, firms and the government own factors of production and distribute goods/services

  • In reality, almost every country in the world operates as a mixed economic system

  • Some countries have more government intervention than others e.g. China has more intervention than the USA

  • The higher the level of government intervention, the more the economy will lean towards operating like a planned economy 

• Governments intervention is necessary for several reasons  

• To correct market failure: in many markets there is a less than optimal allocation of resources from society's point of view

  • In maximising their self-interest, firms and individuals will not self-correct this misallocation of resources and there is a role for the government

  • Governments often achieve this by influencing the level of production or consumption  

• Earn government revenue: governments need money to provide essential services, public and merit goods

  • Revenue is raised through intervention such as taxation, privatisation, sale of licenses (e.g. 5G licenses), and the sale of goods/services

• Promote equity: to reduce the opportunity gap between the rich and poor  

• Support firms: in a global economy, governments choose to support key industries so as to help them remain competitive  

• Support poorer households: poverty has multiple impacts on both the individual and the economy 

  • Intervention seeks to redistribute income (tax the rich and give to the poor) so as to reduce the impact of poverty

• As we have seen in 2.10.3 Government Intervention to Address Market Failure, four of the most commonly used methods to intervene in markets are indirect taxation, subsidies, maximum prices, and minimum prices  

• Additional methods of intervention include regulation, nationalisation, privatisation, and the State provision of public goods