III] Mixed economy


A mixed economy is of a recent origin. Capitalism and socialism both have their own advantages and disadvantages e.g. capitalism leads to unemployment, equality etc. Great depression of 1930 exposed the short comings of capitalism since it could not provide a solution to the problem of unemployment of mass poverty specially socialism too could not provide a solution though it promised to do so through a classless society and complete eradication of exploitation.

Therefore mixed economy emerged. It has good points of both capitalism and socialism (which are extremes) and therefore mixed economy is a blend of capitalism and soci8alism.  M>E> is one where the productive resources of country are allocated and utilised partly through private decisions of individuals and partly through the government control.

Objectives of mixed economy:

i) To develop the economy rapidly by means of planning.

ii) To decrease inequalities of income and wealth.

iii) To control th3e key and basic industries.

iv) To increase peoples welfare and social security.

Features of mixed economy:-

1. Coexistence of the private and public sectors where the complete responsibility in case of the private sector rests with the private enterprise and the public sector is completely controlled by the government.  The government is responsible for its organisation, management and controled.  The role of the public sector is defined in clear and definite terms and also specific public utility services, certain key and basic industries, construction of social overheads, roads, bridges, irrigation facilities, arms and ammunition and atomic energy are reserved for the public sector i.e. everything of national importance.

This division is done with a view to maximise social welfare and allocation of resources.

2. The co-existence of profit motive and social welfare or social gain motive where the private sector is profit motivated and public sector is welfare motivated.

3. Co-existence of price mechanism and government direction price mechanism plays an imp. role in the private sector as all the commodities produced in the private sector are sold in the market.  The prices of these goods allocated resources according to the demand for them.

In the public sector though the main of the govt. is the maximise social welfare price mechanism cannot be completely neglected while determining the allocation of resources i.e. social benefit cannot be attained at the sacrifice of efficient production.

Therefore this system possesses the advantages of both capitalism and socialism and therefore assumed to be more efficient them either of them. 4. The government however regulates and controls the private sector whenever it is necessary i.e. whenever it is in the interest of the nation.

Through the licensing policy, monetary and fiscal policies, incentives, inducements and encouragement and disincentives and encouragement.

5. Consumers sovereignty is protected as govt. controls price and therefore ensures a fair distribution of production.

Protection of labour through the maximum wages act, licensing policy, employment act etc. govt. also takes measures to settle industrial disputes.

7. Inequalities and exploitation decreases i.e. through govt. controls provisions of social security measures etc.

8. Government controls monopolies e.g. in India monopoly and restricted trade practices commission (MRTPC)

9. Economic planning is democratic decisions are taken after discussions, consultation and debate among the representatives of the people.  Public consent is present in every planning programme the private. sector is also given liberty.  Planning is through price mechanism and market mechanism.

It lays down the areas of operation of private and public sectors and fixes their targets private sector is allowed to function freely in the govt. limits.

10. Merits:-

a) Faster economic development is possible especially in the developing countries.

b) It is more stable as it aims and achieves both profits and welfare.

c) It reduces inequalities of income and wealth so as to improve the standard of living.

d) Institution of private property is protected but within the limits fixed by the government therefore it protects general interest.

e) Provides scope for private. initiative and profit motive

f) Increases efficiency of both the sectors and promotes a healthy competition between them.

g) Price mechanism exists.

h) Provides freedom for producers, consumers and labourers within prescribed limits and economic liberty.

i) Adopts democratic planning

11. Demerits:-

a) May create monopolies

b) May cause inequalities because of private ownership and profit motive.

c) May become difficult for the private and public sectors therefore private sectors get less and they may not achieve their targets.

d) The public sector may expand at the cost of the private sector (to the extent that private sector might also disappear) Therefore may not remain fixed in the true sense for long.

e) Private sector may start depending on the public sector for growth and lose initiative.

f) Problem of allocation of foreign exchange between private and public sectors, less might be provided for the private and therefore it may not achieve its targets.  12. For the efficient working of mixed economy prefer understanding between private and public sector sna d a perfect understanding of such a system by both sectors is necessary to solve its problems efficiently.


1. Basic industries including public utility services should be undertaken by the government therefore efficient allocation of resources.

2. Inequalities of income and wealth should be reduced. With the help of fiscal and monetary policies to equalise distribution of income and wealth, progressive taxation should be adopted.

3. There should be adequate provision for social security, insurance against unemployment and accidents as well as old age pensions etc.

4. There should be efficient economic planning and functioning.

Mixed economy in India

Theoretically speaking a consumer in a capitalist economy enjoys perfect freedom of consumption.  He is free to spend his income in the manner he thinks best.  It is his preference which influence and regulate the nature of economic activity in a capitalist country.  He directs distribution of economic resources among various industries. The entire production activity in country is undertaken to satisfy him.

Every producer has to study the nature requirements tastes and preferences of the consumer before the initiate’s production. If he disregards them and produces things which do not satisfy the consumer he has to incur heavy losses.  If he is be unable to sell the goods in the market. Therefore under capitalism the consumer is the King or Master. He is the sovereign who rules the economy and the producer is his servant.

The tastes and preferences of the consumer are revealed to the producers through the price mechanism which guides the producer in his production activity (e.g. redistribution of resources).

Preference of consumer also guides the investor in his investment decisions i.e. he wants maximum returns from his investment.  Therefore he will invest in industries which are making maximum profits (guided by the price mechanism).  Therefore price mechanism guides investor in his investment.

In a capitalist economy consumers choice is revealed through price mechanism which determines the level of production activity.

However consumer’s sovereignty is limited by :-

  • Production powers of the economy.
  • State of technical knowledge
  • Purchasing power
  • Restrictions by the state e.g. prohibition.
  • Taxation reduces the real income
  • Monopoly
  • Fashions and customs
  • Standardised production cheap little choice
  • Advertisements
  • Rationing during war times etc.

Consumers sovereignty is desirable because it enables them to make the right choice but in capitalist countries where there is poverty inequality etc. consumers sovereignty becomes meaningless of the consumer has no money to spend.

Consumers sovereignty may cause wrong and uneconomic utilisation of resources (buying may be influenced by customs impulse emotion advertisements etc.

The consumer may not understand his own interest (contaminated food from hawkers) Therefore government intervention is necessary. In daily consumption however the average consumer should have freedom as he can make rational decision.


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