Why are most countries mixed economies?
Nowadays, most countries prefer to have joint economic systems, of both planned and market systems which is known as mixed economy. “ In a mixed economy, the government and private sector interact in solving economic problems” (David B, 2009:327). In other words, mixed economy is a combination of market economy and centrally planned economy. “A market economy is an economy in which decisions about production and consumption are made by individual producers and consumers.” (Krugman P, 2008:2)
To start with, some countries have a free market system. “In a free market, decisions about what to produce are determined by supply and demand in product markets.” (Gillespie A, 2007:114) In a free market producers have profit maximizing objective and consumers are aiming to maximize their utility. Most economists argue that the free market system is perfect in maximizing welfare of society as it has so called market forces which…… Therefore there is no need for government intervention as there is a big possibility of government failure. “In a free market system, the price mechanism will adjust to equalize supply and demand. At this point, the welfare of society will be maximized.” ( Gillespie A, 2008,115) Therefore, most economists assume that market forces allocate resources efficiently and productive efficiency occurs as well. “ In a market where there are many buyers and sellers, competition forces producers to produce at lowest cost” (Anderton A, 2008:92) Many other economists think that if market is left by himself it often fails to allocate resources efficiently. DEF. Free market often leads to monopoly. DEF. If one firm dominates more than 25% of market than it means that this firm has monopoly power. Monopoly is a market failure, because producers who dominate the market often sell products at higher prices, because of lack of competition. They although will not be motivated to produce at higher quality and...
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