The mixed market economy.
This essay analyses the Mixed Market Economy and determines how effective it is in allocating resources. In order to discuss this, the essay includes the features of the Command Economy with the advantages and disadvantages. In contrast the Market Economy is discussed with its advantages and disadvantages emphasizing on the Price Mechanism. Then the Mixed Market Economy is analysed referring to its advantages and disadvantages. Fourthly, the Allocative Efficiency of resources in the Mixed Market Economy is discussed. Followed by the paragraph about Market Failure and how government intervention can make the Mixed Market Economy more efficient. Lastly, a real world example of a mixed market economy is given to support the argument.
The Command Economy is also called a centrally planned economy because the state decides what to produce, how to produce and for whom to produce. Therefore the state owns the factor of production. The aim of the Command Economy is greater equality of income and wealth and everybody has identical standard of living.
The advantages of the Command Economy are that unemployment doesn't exist because workers are allocated to jobs by the state. Also there is more economic certainty in a command economy because for example the income remains the same after an industrial accident; this contributes to the welfare of the country.
The disadvantages of the Command Economy are that the consumers have little choice about what they buy. And as monetary reward in the Command Economy stays the same, the workers have little incentive to work hard and well. The Command Economy is less efficient at allocating resources than the market economy, since the allocation is planned and doesn't respond to the market and the needs of the consumer. There it is difficult to react flexible and quickly to changes in economic conditions and this causes the failure of the Command Economy. One real world example in China is "The resulting inefficiency is illustrated by the washing machine industry. Massive over-capacity has occurred because the industry has not responded to the needs of the consumers. Last year 30 million machines were produced, yet only 11 million were sold domestically and 500,000 abroad"1
In contrast to the Command Economy, the factors of production in the Market Economy are owned by individuals or firms and the Market Economy's features are self-interest, competition, and profit making. The three economic questions what to produce, how to produce and for whom to produce are decided by the market mechanism.
One advantage of the Market Economy is that consumers and suppliers have freedom of choice. But the most important advantage in the Market Economy is the price mechanism, which determines the allocation of resources efficiently. The price mechanism, as shown in diagram 1, includes ...
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In contrast to the Command Economy, the factors of production in the Market Economy are owned by individuals or firms and the Market Economy's features are self-interest, competition, and profit making. The three economic questions what to produce, how to produce and for whom to produce are decided by the market mechanism.
One advantage of the Market Economy is that consumers and suppliers have freedom of choice. But the most important advantage in the Market Economy is the price mechanism, which determines the allocation of resources efficiently. The price mechanism, as shown in diagram 1, includes the demand curve D and the supply curve S, which meet at the equilibrium e1, this is the market price of the good. The price mechanism, shown in diagram 1, responds to the demand of the consumers (D) and the self-interest of the supplier (S). Through this meeting of demand and supply at e1, not only the market price is decided, but also the quantity q1 to be produced is decided.
The disadvantages of the Market Economy are that there are large differences in income and wealth distribution because only people who own factors of production can make profit. Unemployment is a big issue in a market economy because it might not be profitable to employ workers.
Despite the price mechanism, there is still misallocation of resources due e.g. the monopolistic structures in the market.
The market is the best way of allocating resources but it still brings along many disadvantages. So there must be a "better" economic system than the Market Economy.
The "better" economic system is the Mixed Market Economy, which combines the advantages of the Market Economy and the Command Economy. In the private sector (market) goods and services are provided through the market mechanism, which combines the demand of the consumers and the self-interest of the suppliers (profit making) to decide what is to be produced. In the Mixed Market Economy the state provides public goods like law, defence etc. and merit goods like education and health care. The government can provide these services through government revenues e.g. taxing people's income (direct) and spending (indirect).
Like in the Market Economy, people in the Mixed Market Economy who own most valuable factors will gain a larger share of goods produced in the private sector than those who are relatively poor. Also consumers have a grater choice of what they want to buy due to the competition of the firms in the market. Another aspect of the Mixed Market Economy is that individuals have an overall greater choice, which leads to a higher level of welfare because individuals can allocate their factors of production to the use which maximises their utility or welfare.
Like in the Command Economy, the government in the Mixed Market Economy intervenes in the actions of the economy. The government gives goods and services to people who need it. The state redistributes income so that it is not only owners of factors of production, who are able to buy goods and services in the private sector of the market. A real world example for the welfare system would be the UK, where government provides unemployment benefits and free health care for those who cannot afford to pay.
One problem of the Market Economy still exists in the Mixed Market Economy and this is unemployment. But here again, the government intervenes, the government helps unemployment by creating jobs in their own offices and by helping private firms to provide jobs.
"Allocative efficiency means that resources should be allocated to match the wants of society"2. Another definition is "An allocation of resources is efficient if no redistribution would enable one individual to be made better off without making someone else worse off"3. This means that an efficient allocation of resources should consider both the consumer (demand) and the producer (supply) and it should content the needs of both. The best way is again the price mechanism. Effective resource allocation is when the market finds an equilibrium shown in diagram 2. As D shifts to D1 a shift in demand has occurred and now the market has to allocate the resources efficiently to match up the consumers demand. In Market A the resource allocation is efficiently and e1 moves to e2. Also the quantity which is the resource allocation shifts from q1 to q2 as the consumers demand is pushing the supplier to use more resources.
This is resource allocation using the price mechanism in the Market Economy but also the Mixed Market Economy. But still Market Failure occurs.
Market failure occurs when the market cannot achieve an optimum resource allocation. This may occur when markets are dominated by Monopoly producers and where no competition takes place. But in the Mixed Market Economy, Market Failure can be reduced by government intervention to regulate markets through e.g. competition policy, industrial policy, price support system etc.
A real world example for Mixed Market Economy is the United Kingdom, where the allocation of resources is efficiently shown by Table1. "In general, 2000 was a year in which economic performance in the UK was highly satisfactory. Growth picked up, inflation remained low, and unemployment fell to historically low levels"4 The table shows that in year 2000 the GDP growth has become slightly higher 3.1% and also the inflation rate remained low at 2.1. Also unemployment become less 1.1 and manufacturing has increased to 1.8. This shows that the allocation of resources works well in the UK.
This essay has argued that the Mixed Market Economy combines the advantages of the Market Economy mainly the price mechanism, and the advantages of the Command economy mainly the government intervention, to bring the best together. The Mixed Market Economy is a "processed" version of the Market Economy, making the allocation of resources more efficiently through government intervention in Market Failure. Also other disadvantages in the Market Economy have been reduced by introducing the ideas of government intervention of the Command Economy, including reducing unemployment and welfare. Most of the rich developed countries in the world including Germany, UK, France etc are mixed market economies, which indicates that the Mixed Market Economy is the "best" economic system at allocation resources existing.
Economic Review, September 2002
2 Economic Review, September 200
3 Vilfredo Pareto
4Economic Review, April 2001
Lie-Tin Wu IB Economics HL1
Economics Essay Mr. Buckley
