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Because of the problems of both free-market and command economies, all real-world economies are a mixture of the two systems.
In a mixed economy, some resources are owned by the public sector (government) and some are owned by the private sector.
Decisions on most important economic issues involve some form of planning (by private as well as public enterprises) and interaction between government, businesses and labour through the market mechanism.
The mixed economic system obtains the best of both the planned and market systems. For example, necessary services are provided for everyone whilst most other goods are competitively marketed.
Private ownership of productive resources operates alongside public ownership in many mixed economies.
The degree of public and private sector involvement in economic activity is determined by the government.
The private sector in a mixed economy
In the private sector, profit acts as the motive for firms to provide the goods and services demanded by consumers.
Producers and workers have incentives to work hard, to invest and to save.
There is a large degree of economic freedom with plenty of choice for private individuals and firms
The public sector in a mixed economy
In the public sector, the government may control the following:
Relative prices of goods and inputs, by taxing or subsidising them or by direct price controls.
R elative incomes, by the use of income taxes, welfare payments or direct controls over wages, profits, rents, etc.
The pattern of production and consumption, by the use of legislation, by direct provision of goods and services, by taxes and subsidies or by nationalisation.
Issues of transition when central planning in an economy is reduced
The restructuring of the economy and the moves to privatise former state-run activities are accompanied by substantial job losses and the need for social reform