The term mixed economy refers to a system of economic organization in which the performance 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 ( supply and demand law ). However, the State has an essential complementary role.
Therefore, in this mixed system, most decisions are made by private agents of the economy (households and businesses), who decide what, how and where to produce. But at the same time, the actions of the State are also present, covering market failures , such as providing the public 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 to solve 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. For example, it ensures the existence and defense of private Property Rights, establishes channels for resolving disagreements, etc.
- Regulation: The State intervenes when there are market failures that prevent achieving an efficient result. For example, when there are public assets such as national defense, the State is responsible for 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 hiring 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 light, sewer, 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 the planned economy, but 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 distributive 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. Usually, these resources 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 in view of the limitations of the two existing economic systems to date: the market economy system and central planning , a new system began to be applied in most of the countries of Western Europe, 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 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 usually has a greater weight than in North America. In contrast, in economies such as China, which is considered planned, although the State is the main protagonist, in certain regions and sectors, market action is allowed. Consequently, it also ends 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, those where most economic decisions are based on state action; but in practice, all (or the vast majority) of the existing economies combine elements of both and therefore are mixed economies.
