Unit 2: Economic Systems
Lesson 2.4: Mixed Economies
What You Will Learn!
Mixed economies are economic systems where individuals and businesses
make decisions about how to answer the three economic questions, with
some government intervention. SS.912.E.1.3.
A public good is a good or service that has no profit, and is usually provided
by the government. SS.912.E.2.11, SS.912.E.3.4.
An externality is a good or service that creates a benefit or cost to an
individual who is not consuming the product. SS.912.E.2.11, SS.912.E.3.4.
A circular flow diagram can be used to show how a mixed economy works.
SS.912.E.2.12.
Other countries with mixed economies can be compared to the United States.
SS.912.E.3.5.
Key Point #1. Mixed economies are economic systems where individuals
and businesses make decisions about how to answer the three economic
questions, with some government intervention.
In previous sections, we explored traditional economies—where communities
make decisions, command economies—where governments make decisions, and
market economies—where individuals and businesses make decisions. Looking at
command and market economies as polar opposites of each other, what if there was a
middle ground? What if there was an economy which combines private decisionmaking with government intervention?
Welcome to mixed economies. Mixed economies are economic systems where
individuals and businesses make decisions about how to answer the three economic
questions, with some government intervention. Most economies in the world today are
mixed economies, including the United States. Accurately, the United States is a mixed
economy based on free market principles, with limited government intervention. As we
talked about in previous sections, the amount of government intervention in a mixed
economy will be different from country to country.
Why do we need a mixed economy? Can’t market economies provide everything we need without government intervention? Isn’t that the basis for laissez-faire? Doesn’t self-interest and competition help ensure self-regulation of the economy? For the most
part, the answer to these questions is yes, but not everything can be supplied by the
market. Remember, producers want to make money, that’s the overriding incentive.
Even if consumers want a product, or it’s in the best interest of the country to make a product, if producers don’t have an incentive to make the product, or provide enough of it, then producers won’t make it. This is where government steps in.
Key Point #2. A public good is a good or service that has no profit, and is
usually provided by the government.
What kind of goods would the market not produce that we would need or want?
Well, a good example is actually a public school. It is in America’s best interests that we have an educated population, people with knowledge to be plumbers, doctors,
mechanics, and lawyers. We also need our citizens to have a basic working knowledge
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Unit 2: Economic Systems
Lesson 2.4: Mixed Economies
of our society, its history, and yes, its economy. The American government set up
public schools very early on after the Revolution to give its citizens the working
knowledge to succeed in our country.
A public school is an example of a public good. A public good is a good or
service that has no profit, and is usually provided by the government. We use public
goods all the time, from highways to public transportation, and yes, even dreaded
schools. Public goods are products that producers are just not going to be willing to
make because they have no incentive to do so. Even if there was a financial incentive
for the producer to make a public good, the good might suffer from a “free rider.” A free
rider is an individual who benefits from a good or service, but doesn’t pay for it. For example, you and some of your friends watch the next Justin Bieber concert on pay-perview. You pay for it, but your friends do not. Everyone enjoys the concert, but your
friends got a “free ride,” they didn’t pay for the benefit. You could charge them, but then
you wouldn’t have any friends. Public parks, highways, public schools are all examples
of public goods. Without government setting aside funds or land to build these public
goods, they would not be available to the public. When the market fails to provide a
product, we call this market failure.
Key Point #3. An externality is a good or service that creates a benefit or
cost to an individual who is not consuming the product.
Another reason for mixed economies has to do with externalities. An externality
is a good or service that creates a benefit or cost to an individual who is not consuming
or producing the product. That’s a mouthful. It’s best to think of externalities as positive and negative.
A positive externality is a good or service that creates a benefit to an individual
who is not consuming the product. That doesn’t sound so bad, and indeed, it is not. A
good example of this that you might use every day is Twitter. If you had one person
using Twitter, then that person—let’s call him a twit—would be awful lonely, and Twitter
wouldn’t have any value. If you have millions using Twitter, then suddenly millions of
twits can communicate ideas, and Twitter suddenly becomes incredibly important in
everybody’s lives. Rotten Tomatoes, a movie review site, expands its influence within
the movie industry, and will let you know in 140 characters whether Hunger Games:
World Cup Edition is fresh or rotten. Your teacher can tweet tonight’s homework to you, and you can retweet it to your classmates. Twitter can also apparently let you know
where the revolution is taking place. And I’m not kidding. In recent uprisings and revolutions in Egypt and Libya,
Twitter was used to great effect in organizing protests and
fights.
So what does that have to do with a mixed
economy? Well, sometimes we want our citizens to have a
benefit beyond what an individual might have alone. Case
in point, the polio vaccine.
Polio is a devastating
contagious illness, and a deadly one as well, especially to
children. Polio knows no limits, affecting everybody in its
wake, rich and poor, famous and obscure, in strong
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Unit 2: Economic Systems
Lesson 2.4: Mixed Economies
countries and weak. If you survived it, paralysis in the legs was a likely result, as one of
our own presidents, Franklin D. Roosevelt, can attest to.
In 1952, Jonas Salk developed a vaccine to cure polio, a simple vaccine that can
be administered now with a drop on the tongue. Given the deadly nature of the
disease, countries around the world, including our own, wanted to make sure that its
citizens got it, and governments helped provide the vaccine at a reduced cost or even
free. If one citizen gets the vaccine, certainly he benefits from not getting polio.
However, his family and friends—all the people around him also get a benefit by not
being exposed to polio. This is the positive externality. Multiply that by millions of
people, and the positive externality expands to the rest of the world, a world without
polio.
A negative externality is a good or service that creates a cost to an individual
who is not consuming the product. Compare that to the positive, and that doesn’t seem
so good, and indeed, it is not. A classic example of a negative externality is pollution.
All kinds of pollution—air, water, noise, even light. The Griffith Observatory in Los
Angeles was built almost 100 years ago, and has served as a home for many
astronomers and physicists. Since astronomers do their work by looking up at the night
sky, darkness is a necessity. 100 years ago, not a light came from the city of Los
Angeles. Now, the City of Angels is the second largest city in the United States, with
almost 4 million people. The light from Hollywood alone would make it difficult for any
stargazer.
Volusia County is home to some terrific natural springs, including Blue Springs
and DeLeon Springs, not to mention some fairly clean beaches. These are not only
places to do some great swimming, but are also home to one of Florida’s unique and silly creatures, the manatee. Manatees may be ridiculous looking animals, but they
serve a great purpose in Florida’s ecology. Manatees eat enormous amounts of plants
that would otherwise clog up our waterways. They help keep our rivers and lakes clean.
Seriously though, they’re silly animals.
So again, how does this
work with a mixed economy?
Air pollution is one of the biggest
areas
in
climate
change
research and pollution control.
Air is important. If air is dirty, we
can’t breathe. If we can’t breathe, we die. Death is bad.
Thing is power companies, one
of the largest producers of air
pollution, do not have an
incentive by themselves to
reduce air pollution, whether by making cleaner energy or switching to different fuels, or
other ways. Governments step in with regulations, subsidies, and taxes to encourage
polluters to find cleaner ways of producing energy, including solar and wind. Without
intervention, ultimately, the air becomes unbreathable and causes great health
problems. Los Angeles has struggled with air pollution for quite some time now, with
one of the biggest effects of energy pollution and car emissions being smog, and the
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Unit 2: Economic Systems
Lesson 2.4: Mixed Economies
city and the state of California have passed laws to help clean up the air. In China’s capital, Beijing, air pollution has gotten so bad, that citizens there have to wear masks
on heavy smog days, and there are smartphone apps that track the pollution. And that
pollution doesn’t just stay in China, it travels throughout our atmosphere.
To summarize, the biggest advantage of a mixed economy is allowing the
government to provide for public goods and respond to externalities when the market
fails to provide solution. To be clear, this isn’t a criticism of market economies. Rather,
it’s a recognition that the market economy provides most products well, but requires an incentive to do so. In public goods and externalities, there is no incentive. That’s where the government tends to come in.
Key Point #4. A circular flow diagram shows how individuals and
businesses interact in the market.
Let’s go back to the circular flow diagram again, except this time, we’re going to add a new actor to the economy,
in addition to households and firms:
government.
We still have the product and
factor market, and the interactions
between households and firms, that
hasn’t changed. Remember, in the product market, we sell goods and
services. On the money end, households
buy the goods and services from the
firms. In exchange for the money, the
firms will provide the households with
goods and services. In the factor market,
we’re looking at resources. Firms need the resources to make the products, so
they will buy the factors of production—
land, labor, capital—from the households. In exchange for the money, households will
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Unit 2: Economic Systems
Lesson 2.4: Mixed Economies
provide firms with the resources to make goods and services. Another way to look at
the circular flow diagram is as a whole. On the money end, households buy goods and
services from firms, and firms buy the factors of production from the households. In
exchange, firms provide goods and services to the households, and households provide
firms will land, labor, and capital.
In a mixed economy, the government is another actor alongside firms and
households. On the money end, governments collect taxes from the households and
firms in the product and factor markets. These taxes are the revenue, or income, for the
government. At the same time, government has to buy products and resources from
the households and firms.
Wait, the government has to buy the products and resources? Yes, it most
certainly does. Governments generally don’t create products. When the City of Holly Hill needs to buy paper clips, it doesn’t go out and build a paper clip factory to get what
it needs. It puts an order in at Office Depot, and that’s that. Similarly, when the U.S. government wants a tank, it orders it from defense contractors. That does include
resources from time to time, most importantly, labor. People don’t work for free usually, so yes, governments have to pay their workers.
Can’t the U.S. government just take what it wants? Sure. They have tanks after
all, and an air force. I’m pretty sure they could take DeLand in a fight. Where
government just simply takes what it wants is called nationalization, and it does
happen in some countries. For the most part, however, we prefer to keep everything in
private hands, and let our own citizens make the decisions about what to make, how to
make it, and for whom to make it.
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Unit 2: Economic Systems
Lesson 2.4: Mixed Economies
Key Point #5. Compared to other countries, the United States ranks first
among other mixed economies.
The United States is a mixed economy, and the most succesful one in the world.
As mentioned earlier, most countries in the world have some kind of government
intervention and would thus be classified as a mixed economy. The degree to which the
government plays a role in the economy, however, varies according to how comfortable
citizens are with government intervention.
The following table was made by the United Nations, and is a list of mixed
economies ranked according to how much they produce, something we call gross
domestic product. We’ll talk more about gross domestic product later in the course. In
2012, the U.S. produced more than $16.2 trillion dollars’ worth of goods and services.
Compare that to our second place finisher, China, with a mere $8.3 trillion. The tiny
Pacific island nation of Tuvalu comes in last—193rd—with a mere $40 million, but of
course, it has fewer resources.
Largest Economies in the World in 2012
GDP
Rank
Country
(in U.S. dollars)
1
United States
$16.2 trillion
2
China
$8.3 trillion
3
Japan
$5.9 trillion
4
Germany
$3.4 trillion
5
France
$2.6 trillion
6
United Kingdom
$2.4 trillion
7
Brazil
$2.2 trillion
8
Russia
$2.0 trillion
9
Italy
$2.0 trillion
10
India
$1.8 trillion
193
Tuvalu
$40 million
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