Mixed EconomiesChapter 2, Section 4

Mixed Economies

• Most economic systems today are mixed

• No one is strictly Centrally Planned/Free Market

Why Mixed Economies?• Free Markets can’t solve all needs:

• Education

• Health care

• Defense

• Infrastructure

• Social programs

• Adam Smith even believed in some gov’t intervention. NOTHING IS laissez faire.

Control vs. Freedom• Balance must be met: Individual/Gov’t

• Society decides priorities & evaluates opportunity costs

• Do you want to:

• Subsidize the military?

• Save endangered species?

• Subsidize education?

• Provide health care?

• Etc…

Circular Flow for Mixed Economies• Government in the Factor Market

• Government purchases land, labor, and capital

• i.e., U.S. pays roughly 2.8 million employees $9.7 billion a year in wages

• Government in the Product Market

• Governments purchase finished goods for their operations

• Cars, office supplies, defense hardware, benefits for employees

• The government also provides finished products

• i.e., roads

Gov’t Role in a Mixed Economy• the government

purchases goods and services in the product market, and

• purchases land, labor, and capital from households in the factor market.

Level of Government Intervention

• Some economies are very centrally planned (North Korea, Cuba)

• There are privatized goods and sales on the Black Market

• China and Russia are in a state of transition.

• The federally owned assets of the past are being privatized

• Others are quite free (Hong Kong, US, Canada)

Hong Kong

• Hong Kong: special administrative district of China

• World’s freest market...

• Few barriers on foreign trade

• Open to foreign investment

• Independently operated banks

Continuum of Mixed Economies

Continuum of Mixed Economies

Centrally planned Free market

Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick

Iran

North Korea

Cuba

China

Russia Greece Peru United States

South Africa France United Kingdom

Botswana Canada Singapore

Hong Kong