Understanding the Mixed Economic System (Cambridge (CIE) IGCSE Economics): Revision Note

Characteristics of a mixed economic system

• Any economic system needs to decide how to answer the three fundamental economic questions

  • What to produce? More weapons for the military or more schools to educate children?

  • Who to produce for? Only those who can afford to pay for it? Or for everyone in society?

  • How to produce it? Should more labour be used, or should the economy focus on using technology instead?

• A mixed economic system is a blend of a market and planned economy

  • Individuals, firms and the government own factors of production and distribute goods or services

  • In reality, almost every country in the world operates as a mixed economic system

  • Some countries have more government intervention than others

    • e.g. China has more intervention than the USA

  • The higher the level of government intervention, the more the economy will lean towards operating like a planned economy

Why do governments intervene?

To correct market failure

• In many markets there is a less than optimal allocation of resources from society's point of view

  • In maximising their self-interest, firms and individuals will not self-correct this misallocation of resources and there is a role for the government

  • Governments often achieve this by influencing the level of production or consumption  

To earn government revenue

• Governments need money to provide essential services and public and merit goods

  • Revenue is raised through intervention such as taxation, privatisation, sale of licenses (e.g. 5G licenses), and the sale of goods/services

To promote equity

• To reduce the opportunity gap between the rich and poor  

To support firms

• In a global economy, governments choose to support key industries to help them remain competitive  

To support poorer households

• Poverty has multiple impacts on both the individual and the economy 

  • Intervention seeks to redistribute income (tax the rich and give to the poor) so as to reduce the impact of poverty

Arguments for and against the mixed economic system

• The majority of economies in the world operate as a mixed economic system

• The extent to which they are mixed varies

  • Some lean more towards the free market

  • Other lean more towards a planned economy

• North Korea is a planned economy

• The United States, Japan and Singapore are mixed economies but have less government intervention than Norway, Germany or China

Evaluating mixed economies