A mixed economy is defined by the co-existence of a public and private sector. The specific mix between public and private can vary significantly from one mixed economy to another, however. Based on their respective natures, the private sector is subservient to the public sector. Private exchange can only take place where the government has not forbid it or already assumed that role.
Mixed economies fall in between free markets and command economies. The free market is most closely associated with pure capitalism. A command economy is most closely associated with socialism. Mixed economies, with state-supervised markets, are most related to fascism (in the economic sense) and have several common features.
Resource Ownership
In a command economy, all resources are owned and controlled by the state. In a mixed system, private individuals are allowed to own and control some (if not most) of the factors of production. Free market economies allow private individuals to own and trade, voluntarily, all economic resources.
State Intervention
Government intervention and political self-interest play a key role in a mixed economy. This intervention can take many forms, including subsidies, tariffs, prohibitions and redistributive policy. Some of the most universally applied mixed economic policies include legal tender laws, monetary control by a central bank, public road and infrastructure projects, tariffs on foreign products in international trade, and entitlement programs.
Changing Economic Policy
One important and understated feature of a mixed economy is its tendency for reactionary and purposeful economic policy changes. Unlike in a command economy (where economic policy is very often directly controlled by the state) or a market economy (market standards arise only out of spontaneous order), mixed economies can go through dramatic changes in the “rules of the game,” so to speak.
This is because of the changing political pressures in most mixed economies. An example of this can be seen in the aftermath of the Great Recession, when most governments moved to tightly regulate financial markets and central banks lowered interest rates.
Advantages of a Mixed Economic System
Allows capitalism and socialism to coexist: A mixed economic system allows capitalism and socialism to coexist and function by segregating the roles of the government and the private sector. Capitalism sets prices through an equilibrium between supply and demand on private goods, while socialism sets prices through planning where the private sector fails or does not want to produce certain goods, such as public transportation, universal health care and education. The government plays a crucial role in promulgating and enforcing laws and ensuring fair competition and business practices.
Allows government to internalize positive and negative externalities: The production of certain goods and use of resources by the private sector can come at a cost of their underproduction or overuse. For example, paper mills and mining companies are known for using too much water or polluting it during the production process, generating a negative externality for the general population who drinks this water. A mixed economic system ensures the government can step in and correct for the negative effect of the externality by either prohibiting harmful activity or heavily taxing it.
Allows for correction of income inequality: Capitalism is known for generating income inequality through a concentration o…