A mixed economic system combines the merits of capitalism and socialism, where the enterprises seek profit and allocate capital and the government exercises indirect influence over economy through its fiscal and monetary policies. Another advantage of a mixed economy is the ability of the government to internalize negative and positive externalities and encourage the production of goods that would have been otherwise ignored by the private sector. A mixed economic system may result in a lower income inequality among the population as a result of the government regulation.
Capitalism and Socialism
A mixed economic system allows capitalism and socialism to coexist and function by segregating the roles of the government and the private sector. Capitalism sets prices through an equilibrium between supply and demand on private goods, while socialism sets prices through planning where the private sector fails or does not want to produce certain goods, such as public transportation, universal health care and education. The government plays a crucial role in promulgating and enforcing laws and ensuring fair competition and business practices.
Externalities
The production of certain goods and use of resources by the private sector can come at a cost of their underproduction or overuse. For example, paper mills and mining companies are known for using too much water or polluting it during the production process, generating a negative externality for the general population who drinks this water. A mixed economic system ensures that the government can step in and correct for the negative effect of the externality by either prohibiting harmful activity or heavily taxing it.
Income Inequality
Capitalism is known for generating income inequality through a concentration of capital. A mixed economic system can correct such a phenomenon by taxing and redistributing wealth to the households located at the bottom of the income distribution.
