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Capitalism socialism mixed economies their advantage disadvantage

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The Balance

Mixed Economy With Pros, Cons, and Examples

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US ECONOMY  ECONOMIC THEORY

Mixed Economy With Pros, Cons, and Examples

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Illustration by Alison Czinkota © The Balance, 2018

BY KIMBERLY AMADEO

 

Updated August 14, 2018

A mixed economy is a system that combines characteristics of market, command andtraditional economies. It benefits from the advantages of all three while suffering from few of the disadvantages.

A mixed economy has three of the following characteristics of a market economy. First, it protects private property. Second, it allows the free market and the laws of supply and demand to determine prices. Third, it is driven by the motivation of the self-interest of individuals.

A mixed economy has some characteristics of a command economy in strategic areas. It allows the federal government to safeguard its people and its market. The government has a large role in the military, international trade and national transportation.

The government’s role in other areas depends upon the priorities of the citizens. In some, the government creates a central plan that guides the economy. Other mixed economies allow the government to own key industries. These include aerospace, energy production, and even banking. The government may also manage health care,welfare, and retirement programs.

Most mixed economies retain characteristics of a traditional economy. But those traditions don't guide how the economy functions. The traditions are so ingrained that the people aren’t even aware of them. For example, they still fund royal families. Others invest in hunting and fishing.

01

 Advantages



Tomasz Zajda / EyeEm / Getty Images

A mixed economy has all the advantages of a market economy. First, it distributes goods and services to where they are most needed. It allows prices to measure supply and demand.

Second, it rewards the most efficient producers with the highest profit. That means customers get the best value for their dollar. Third, it encourages innovation to meet customer needs more creatively, cheaply or efficiently.

Fourth, it automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them.

A mixed economy also minimizes the disadvantages of a market economy. A market economy could neglect areas like defense, technology, and aerospace. A larger governmental role allows fast mobilization to these priority areas.

The expanded government role also makes sure less competitive members receive care. That overcomes one of the disadvantages of a pure market economy. That only rewards those who are most competitive or innovative. Those who can't compete remain at risk.