Economics Chapter 2
Section 4: Modern Economies
• Most mixed economies blend the
market with government
intervention in the marketplace
The Rise of Mixed Economies
Market economies, with all their
advantages, have certain drawbacks.
Limits of Laissez Faire
Laissez faire is the
doctrine that
government generally
should not interfere
in the marketplace.
Governments create laws
protecting property rights
and enforcing contracts.
They also encourage
innovation through patent
laws.
• Government intervention has become
greater because some needs & wants are
difficult to answer in the market
• Some needs that markets could meet fall
to the government so that all members of
society can participate
–Education, health care, mass transit
• Governments create laws protecting
property rights & enforcing contracts
Balancing Control & freedom
• Society must assess its values & prioritize
its economics goals & they must evaluate
the opportunity costs of pursuing each
goal
• Each nation decides what it is willing to
give up to meet its goals
Government’s Role in a Mixed Economy
In a mixed economy,
• The government
purchases land,
labor, & capital
from households
in the factor
market, &
• Purchases goods
& services in the
product market.
Circular Flow Diagram of a Mixed Economy
Product market
monetary flow
physical flow
Households
expenditures
Government
physical flow
monetary flow
Factor market
expenditures
Firms
Government in the Factor Market
• Governments purchase land, labor, &
capital from households
Government in the Product Market
• Governments purchase goods &
services
• Also provide certain goods & services
through the factor resources that
they combine
Transferring Money
• Governments collect taxes from
households & businesses then use
them for a variety of reasons
Comparing Mixed Economies
• An economic system that permits the
conduct of business with minimal
government intervention is called free
enterprise.
• The degree of government involvement
in the economy varies among nations.
Continuum of Mixed Economies
Centrally planned
Free market
Iran
North Korea
Cuba
South Africa
China
Russia
France
Botswana
Greece
United Kingdom
Canada
Peru
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Hong Kong
Singapore
United States
Mixed Economies where government
intervention dominates
• North Korea
–Government owns all property & all
economic output
–State owned industries produce 95% of
goods
–Almost all imports are banned &
production of goods & services by foreign
companies is forbidden
• China
–¼ of all enterprises are at least
partially owned by individuals
–In a transition period
Mixed Economies where the market
system dominates
• Hong Kong
–Private sector rules
–Government protects private property &
rarely interferes in the free market, except
established minimum wage & price controls
on rent
–Highly receptive to foreign investment &
imposes virtually no barriers on foreign trade
The U.S. Economy
• Free enterprise economy
• Government intervenes to keep order,
provide vital services, & to promote the
general welfare if its citizens
• Enjoys a high level of economic freedom
• Laws protect private property
• Marketplace operates with a low level of
government regulation
• Foreign investment & free trade is
encouraged
• U.S. does protect some domestic
industries & retaliate against trade
restrictions imposed by other nations
• Banking industry operates under
relatively few restrictions