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The mixed economy and market failure
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Every economy must decide what to produce, how and for whom. A mixed economy uses both the market and the government.
Public and private sectors
A mixed economy has both a private sector and a public sector.
Private sector: owned and controlled by individuals and businesses; main objective is usually profit.
Public sector: owned and controlled by the government; objectives include providing services and welfare.
The size of each sector differs between economies.
Private sector: owned and controlled by individuals and businesses; main objective is usually profit.
Public sector: owned and controlled by the government; objectives include providing services and welfare.
The size of each sector differs between economies.
The three questions
What to produce? How to produce it? For whom?
In a mixed economy, the price mechanism answers these for most goods, while the government provides some goods and services (such as defence, health and education) and regulates markets.
In a mixed economy, the price mechanism answers these for most goods, while the government provides some goods and services (such as defence, health and education) and regulates markets.
Market failure
Market failure happens when the free market allocates resources inefficiently.
Examples: too much pollution, too little education or healthcare, public goods not provided, and monopolies charging high prices.
This is why governments intervene: through taxes, subsidies, regulation and providing goods directly.
Examples: too much pollution, too little education or healthcare, public goods not provided, and monopolies charging high prices.
This is why governments intervene: through taxes, subsidies, regulation and providing goods directly.
Why might a government provide free primary education rather than leave it to the market?
- Without intervention, too little education would be consumed.
- This is a form of market failure.
Answer: To correct under-consumption caused by market failure.
A mixed economy has private and public sectors with different ownership, control and objectives. The price mechanism and government together answer what, how and for whom. Market failure is inefficient allocation, which justifies intervention.
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