ECONOMICS

Economics

[Name of Student]

Economics

Qno.1 Even though the free market economy functions automatically, explain why in practice most countries adopted some form of the mixed economy in allocating resources.

Mixed economy is a method of organizing the economy to produce goods and services. Under this economic system, some goods and services are supplied by private enterprise and others, typically basic infrastructure goods and services such as electricity, postal services and water supply are provided by the state. The mixed economy is a characteristic feature of most present-day developed and developing countries, 'pure' or totally private enterprise economies and centrally planned economies being rarely encountered. The precise 'mix' of private enterprise and state activities to be found in particular countries, however, does vary substantially between these two extremes and is very much influenced by the political philosophies of the country concerned.

An economy under which the government intervenes in certain sectors to compensate for perceived market failure—whether of growth, efficiency, or distribution. A mixed economy occupies a position between an unplanned economy with no government interference and a command economy of the type that prevailed in the former Soviet Union. In a mixed economy (Besanko, Braeutigam, 2008, p.14-32), as in an unplanned economy, prices respond flexibly to supply and demand; competition ensures that firms make intensive use of resources; and financial constraints rather than quotas or production targets govern the decisions of firms. As under a command economy, however, a mixed economy nationalizes key industries (although fewer than under strict socialism) and imposes at least some central planning (although such planning remains aggregated at the industry or regional level rather than being firm-specific). Much coordination of supply and demand remains left to the market. Government intervention is exercised through control over expenditures, taxes, and social insurance such as Social Security; the use of regulatory authority; the ability to raise or lower barriers to market entry; and the ability to influence the allocation of investment (Robertson, 1989, p.22-26).

Some economists consider that all Western countries including the United States have mixed economies, especially during the period between World War II and the 1980s when the public sector in all such countries expanded sharply. Other economists, though, apply the label to a narrower range of nations in which the government has asserted consistent leverage over economic growth. Under this latter definition, mixed economies include those of Taiwan, Singapore, South Korea, Japan, India, France, Italy, and Sweden—but not Canada, the United Kingdom, Australia, or the United States, because the planning that exists in the latter group is poorly coordinated. One may further distinguish between types of mixed economies: those under which government leverage comes from its welfare state role, as in Sweden, and those under which leverage lies elsewhere—such as a group or industry that exercises control over the economy (Ekelund, Hebert, 1990, p.78-79).

Capitalism (or “free markets”) was contrasted with socialism (or “communism”), where the features of the former were gleaned from aspects of the United States and its North Atlantic Treaty Organization (NATO) allies, and the latter was ...