Test Your Knowledge Flash Cards 🔒Play Lemonaire 🔒Play Last Stand

Mixed Economic System » The Mixed Economic System

What you'll learn this session

Study time: 30 minutes

Cambridge spec: 2.10.1, 2.10.2

What a mixed economic system is and who allocates resources in it
The advantages of a mixed system compared with a market system
The disadvantages of a mixed system compared with a market system
How to write a balanced answer about the mixed system

🔒 Unlock Full Course Content

Unlock This Course

What is a mixed economic system?

Think about the town where you live. A café, a clothes shop and a taxi firm are run by private owners who want to make a profit. The local state school, the main road and the fire service are run or paid for by the government. Both exist side by side.

That is how almost every country in the world works. Hardly any country relies only on markets. Almost all use a mix of the two.

Key terms:

Mixed economic system: an economic system in which resources are allocated by both the private sector, through the price mechanism, and the public sector.
Public sector: the part of the economy owned and controlled by the government, such as state schools and public hospitals.

In the private sector, prices and profit decide what is produced. In the public sector, the government decides. It collects taxes and chooses how to spend them. So the government answers the three basic economic questions for some goods and services, and the market answers them for the rest.

How the two sectors share the work

🛍 Private sector

Firms sell goods such as phones, food and clothes. Prices, demand and supply decide how much is made and who gets it.

🏛 Public sector

The government pays for or provides goods and services that markets handle badly, such as national defence and some healthcare.

Countries mix the two in different amounts. In Telmara, a made-up country, the government provides schools, hospitals and roads, and private firms provide almost everything else. In Norvik, another made-up country, the government also runs the railways and the water supply. Both are mixed systems. They just have a different balance.

Advantages of the mixed system

A mixed system tries to keep the good parts of the market system and fix some of its weaknesses.

Goods the market fails to provide: the government can pay for public goods, such as national defence, which private firms will not supply because of the free rider problem you met in Public Goods, Merit Goods, Demerit Goods and Monopoly.
More of the goods that benefit society: the government can provide merit goods, such as education, so that people who cannot afford them still get them.
Less harm from external costs: the government can limit demerit goods and goods that cause pollution, which protects third parties.
Protection from monopoly power: the government can step in when one firm abuses its power and raises prices.
More fairness: the government can help people with low incomes, so inequality is smaller than in a market system.
The market still works: private firms still have an incentive to be efficient and to innovate, and consumers still have a wide choice.

Worked example

In Telmara, private firms might not build a rural road because it is hard to charge everyone who uses it. If none did, the villagers could not reach the market town. In Telmara's mixed system the government builds it from taxes, so the villagers can reach the market town. Private bus firms then use the road to earn a profit.

Disadvantages of the mixed system

Having the government involved brings its own problems.

Higher taxes: the government needs tax revenue to pay for its spending. High taxes can reduce the incentive to work, to set up a firm or to invest.
Less efficiency in the public sector: government providers do not face the same pressure of competition and profit, so they may waste resources or respond slowly to what people want.
Government mistakes: officials may not know what consumers really want, so they may provide too much of one service and too little of another.
Less choice and freedom: rules and government provision can limit what firms may sell and what consumers can buy, compared with a market system.
Harder to get the balance right: there is no perfect amount of government involvement, and people disagree about how big the public sector should be.

Worked example

The government of Norvik raises the tax on firms' profits to pay for more public services. Some firms decide that the extra tax leaves too little reward for the risk, so they invest less. The public services improve, but the private sector grows more slowly. This shows the trade-off: a benefit in one part of the economy can cost something in another.

Comparing the two systems

Feature	Market system	Mixed system
Who allocates resources	Only the price mechanism	Price mechanism and the government
Public goods	Not provided	Provided by the government
Inequality	Can be large	Government can reduce it
Government involvement and tax	Low	Higher
Pressure to be efficient from competition and profit	High	Lower in government provision

Remember what you learned in The Market Economic System: that system leaves everything to the price mechanism. The mixed system is a response to its weaknesses, but it creates new ones.

Common mistakes

Saying the government has no role in a mixed system. It does, in both the provision and the rules.
Saying a mixed system is always better. A good answer gives advantages and disadvantages, then makes a judgement.
Writing only that "the government helps". Say how: it provides public goods, limits external costs or reduces inequality.
Forgetting to compare with the market system when the question asks for it.

Exam-style question

Kestria is a country where private firms produce most goods and services. The government pays for schools and hospitals and provides roads and national defence. It also sets rules on pollution from factories.

(a) Define a mixed economic system. [2 marks]

(b) Explain one advantage of a mixed economic system compared with a market system. [3 marks]

Model answer

(a) A mixed economic system is one in which resources are allocated by the private sector through the price mechanism (1) and by the public sector, or government (1).

(b) An advantage is that the government can provide public goods such as national defence (1). Private firms would not provide it in a market system because people can use it without paying (1). So in a mixed system such goods are provided and everyone benefits (1).

(c) A mixed system has advantages. The government can provide merit and public goods, limit pollution and reduce inequality (1), while firms still work efficiently for profit (1). Consumers also keep their choice (1). However, it has disadvantages. Taxes must be higher to pay for government spending, which may reduce the incentive to work and invest (1). Government providers may be less efficient because they do not face competition (1). Overall, whether it is better depends on how large the public sector is and how efficiently the government spends its tax revenue (1).

Exam tip

For "Discuss", write one side, then the other, then finish with a judgement that uses the words "because" or "depends on".

Test Your Knowledge