Merits and Demerits of Mixed Economy

Merits of Mixed Economy:

There are several advantages of mixed economy which are as below:
(i) Encouragement to Private Sector:
The most important advantage of mixed economy is that it provides encouragement to private
sector and it gets proper opportunity to grow. It leads to increase in capital formation within
the country.

(ii) Freedom:
In a mixed economy, there is both economic and occupational freedom as found in capitalist
system. Every individual has a liberty to choose any occupation of his choice. Similarly, every
producer can take decisions regarding production and consumption.
(iii) Optimum Use of Resources:
Under this system, both private and public sectors work for the efficient use of resources.
Public sector works for social benefit while private sector makes the optimum use of these
resources for maximisation of profit.

(iv) Advantages of Economic Planning:

In the mixed economy, there are all advantages of economic planning. Government takes
measures to control economic fluctuations and to meet other economic evils.

(v) Lesser Economic Inequalities:

Capitalism enhances economic inequalities but under mixed economy, inequalities can easily
controlled by the efforts of government.

(vi) Competition and Efficient Production:

Due to competition between both private and public sectors, the level of efficiency remains,
high. All factors of production work efficiently in the hope of profit.

(vii) Social Welfare:

Under this system, the main priority is given to social welfare through effective economic,
planning. The private sector is controlled by the government. Production and price policies of
private sector are determined to achieve maximum social welfare.

(viii) Economic Development:

Under this system, both government and private sector join their hands for the development of
socio-economic infrastructures, Moreover, government enacts many legislative measures to
safe guard the interests of the poor and weaker section of the society. Hence, for any
underdeveloped country, mixed economy is a right choice.

Demerits of Mixed Economy:

The main demerits of mixed economy are as follows:
(i) Un-stability:
Some economists claim that mixed economy is most unstable in nature. The public sector gets
maximum benefits whereas private sector remains controlled.

(ii) Ineffectiveness of Sectors:

Under this system, both the sectors are ineffective in nature. The private sector does not get
full freedom, hence it becomes ineffective. This leads to ineffectiveness among the public
sector. In true sense, both sectors are not only competitive but also complementary in nature.

(iii) Inefficient Planning:

There are no such comprehensive planning in mixed economy. As a result, a large sector of the
economy remains outside the control of the government.

(iv) Lack of Efficiency:

In this system, both sectors suffer due to lack of efficiency. In public sector it is so because
government employees do not perform their duty with responsibility, while in private sector,
efficiency goes down because government imposes too many restrictions in the form of
control, permits and licenses, etc.

(v) Delay in Economic Decisions:

In a mixed economy, there is always delay in making certain decisions, especially in case of
public sector. This type of delay always leads to a great hindrance in the path of smooth
functioning of the economy.

(vi) More Wastages:

Another problem of the mixed economic system is the wastages of resources. A part of funds
allocated to different projects in public sector goes into the pocket of intermediaries. Thus,
resources are misused.

(vii) Corruption and Black Marketing:

There is always corruption and black marketing in this system. Political parties and self-
interested people take undue advantages from public sector. Hence, this leads to emergence of
several evils like black money, bribe, tax evasion and other illegal activities. All these ultimately
bring red-tapism within the system.

(viii) Threat of Nationalism:

Under mixed economy, there is a constant fear of nationalism of private sector. For this reason
private sector does not put into use their resources for the common benefits.

Mixed Economy: Features, Merits and Demerits

Read this article to learn about the mixed economy: features, merits and demerits:

A mixed economy is a golden mean between a capitalist economy and a socialist economy. It is

an economic system where the price mechanism and economic planning are used side by

side.There is mixture of private and public ownership of the means of production and

distribution. Some decisions are taken by households and firms and some by the planning
authority. All developing countries like India are mixed economies.

Features of Mixed Economy:

A mixed economy possesses the following features:

1. Public Sector:

The public sector is under the control and direction of the state. All decisions regarding what,

how and for whom to produce are taken by the state. Public utilities, such as rail construction,

road building, canals, power supply, means of communication, etc., are included in the public
sector. They are operated for public welfare and not for profit motive. The public sector also

operates basic, heavy, strategic and defence production industries which require large

investment and have long gestation period. But they earn profits like private industries which
are utilised for capital formation.

2. Private Sector:

There is a private sector in which production and distribution of goods and services are done by
private enterprises. This sector operates in farming, plantations, mines, internal and external
trade, and in the manufacture of consumer goods and some capital goods. This sector operates

under state regulations in the interest of public welfare. In certain fields of production, both

public and private sectors operate in a competitive spirit. This is again in the interest of the
society.

3. Joint Sector:

A mixed economy also has a joint sector which is run jointly by the state and private

enterprises. It is organised on the basis of a joint stock company where the majority shares are
held by the state.

4. Cooperative Sector:

Under a mixed economy, a sector is formed on cooperative principles. The state provides

financial assistance to the people for organising cooperative societies, usually in dairying,
storage, processing, farming, and purchase of consumer goods.

5. Freedom and Control:

A mixed economy possesses the freedom to hold private property, to earn profit, to consume,

produce and distribute, and to have any occupation. But if these freedoms adversely affect
public welfare, they are regulated and controlled by the state.

6. Economic Planning:

There is a central planning authority in a mixed economy. A mixed economy operates on the

basis of some economic plan. All sectors of the economy function according to the objectives,

priorities and targets laid down in the plan. In order to fulfill them, the state regulates the

economy through various monetary, fiscal and direct control measures. The aim is to check the
evils of the price mechanism.

7. Social Welfare:

The principal aim of a mixed economy is to maximise social welfare. This feature incorporates
the merits of socialism and avoids the demerits of capitalism. To remove inequalities of income
and wealth, and unemployment and poverty, such socially useful measures as social security,

public works, etc. are adopted to help the poor. On the other hand, restrictions are placed on

the concentration of monopoly and economic power in the hands of the rich through various
fiscal and direct control measures.

Merits of Mixed Economy:

A mixed economy possesses certain merits which are as under:

(1) Best Allocation of Resources:

Since a mixed economy incorporates the good features of both capitalism and socialism, the

resources of the economy are utilised in the best possible manner. The price mechanism, the

profit motive, and the freedoms of consumption, production, and occupation lead to the

efficient allocation of resources within the economy. But where the possibility of mal-allocation

of resources appears, the state regulation and control rectifies it. Thus shortages are avoided,
productive efficiency increases, and cyclical fluctuations are eliminated.

(2) General Balance:

A mixed economy maintains a general balance between the public sector and the private

sector. There is competition as well as cooperation between the two sectors which are

conducive for achieving a high rate of capital accumulation and economic growth. Further, an
estimate of the successes and failures of the two sectors can be made by comparing their

respective performances, and corrective measures are adopted accordingly. Thus the

inconsistencies of the private enterprise economy and the ‘paper guesses’ of the planned

economy are avoided in a mixed economy. By maintaining a higher level of production in the
two sectors, the state is able to achieve the targets laid down in the plan.

(3) Welfare State:

A mixed economy contains all the features of a welfare state. There is no exploitation either by
the capitalists as under a free enterprise economy or by the state as under a socialist economy.
The workers are not forced to work, Workers are provided monetary incentives in the form of

bonus and cash rewards for inventions. Labour laws are passed fixing minimum wages, hours of
work, and laying down the working conditions of workers in factories and on farms.

Social security is also provided to workers in the event of unemployment, disablement, death,

illness, etc. The production and sale of noxious articles are banned, while those of essentials are

increased for the benefit of the people at large. Legislative measures are adopted to remove

the concentration of economic power in the hands of the few rich, and to lessen inequalities of
income and wealth.

Demerits of Mixed Economy:

A mixed economy has also certain defects which are discussed below:

(1) Non-Cooperation between the Two Sectors:

The experience of the working of mixed economies reveals that the public sector and the

private sector do not see eye to eye with one another. The private sector is treated like a step-

child and groans under the various restrictions imposed upon it by the state. The private sector

is taxed heavily, while the public sector is given subsidies and preference over the former in the

supplies of inputs. Thus a sense of bitterness and non-cooperation develops between the two
sectors.

(2) Inefficient Public Sector:

The public sector of a mixed economy is a big burden on the economy because it works

inefficiently. Bureaucratic control brings in inefficiency. There is over-staffing of the personnel,

red-tapism, corruption and nepotism. As a result, production falls and losses emerge.

(3) Economic Fluctuations:

The experience of the working of the mixed economic system in the developed countries also
reveals that they have not been able to remove economic fluctuations. This is because of the

improper mixture of capitalism and socialism. The private sector is allowed to operate freely
under a loose system of government regulations and controls. The public sector also does not
operate under the rigid conditions which are laid down under a planned economy.

It has to depend for its supplies of raw materials, intermediate products and factors on the

vagaries of the market mechanism. If in the market, the prices of inputs are increasing due to

their shortages, the public sector will be equally experiencing these shortages and price

increases. Hence economic fluctuations which are a characteristic feature of a capitalist

economy are equally experienced in a mixed economy.

Conclusion:

But the defects of the mixed economy enumerated above are not so acute that they cannot be

overcome. Given efficient and honest administrative machinery, the defects of the public sector

can be removed. The private sector can be made to work more efficiently by proper control and

direction. By adopting fiscal, monetary and physical control measures, economic fluctuations

can be eliminated.

the directive was just ‘Examine’ and not ‘Critically Examine’, what difference would have it
made?
The word ‘Critically‘ is usually added when the examiner clearly demands a
fair judgement from you. You can not take a single stance, or be blind to other facts.
In the above question, the directive ‘Critically Examine’ is given because at the end of the
question you are asked to examine its ‘Success‘ too.