A mixed economic system combines elements of both market (capitalist) and command (socialist) economies. The government intervenes in the market to correct failures, provide public goods, and achieve social objectives while allowing private enterprise to operate in most sectors.
2. How Resources are Allocated
In a mixed system the allocation of resources is determined by:
Market forces (price mechanism) in competitive sectors.
Government intervention (price controls, taxes, subsidies, regulation) in sectors where the market fails.
Public provision of goods and services that are non‑excludable or merit goods.
3. Role of Subsidies
A subsidy is a payment made by the government to producers or consumers to encourage the production or consumption of a particular good or service.
3.1 Diagram – Effect of a Subsidy on the Market
Suggested diagram: Supply and demand curves showing a subsidy to producers. The original supply curve (S) shifts downward/right to S′. The new equilibrium price to consumers falls from P₁ to P₂, while producers receive P₁ (price + subsidy). The government outlay is shown as a rectangle between P₁ and P₂ up to the quantity Q₂.
Mathematically, the subsidy per unit is \$s\$, so the new supply equation becomes:
\$S':\; P = MC - s\$
where \$MC\$ is the marginal cost without the subsidy.
3.2 Interpretation of the Diagram
The subsidy lowers the effective marginal cost for producers, shifting the supply curve rightward.
Quantity supplied and demanded increases from \$Q1\$ to \$Q2\$.
Consumers pay a lower price \$P2\$, while producers receive \$P2 + s = P_1\$.
The area between the two price lines up to \$Q_2\$ represents the total government expenditure on the subsidy.
Potential dead‑weight loss may arise if the subsidy leads to over‑production beyond the socially optimal level.
4. Advantages of Subsidies
Advantage
Explanation
Encourages production of merit goods
Reduces price, increasing consumption of goods with positive externalities (e.g., education, renewable energy).
Supports emerging industries
Helps new or strategic sectors achieve economies of scale and become internationally competitive.
Reduces unemployment
By lowering production costs, firms can expand output and hire more workers.
Corrects market failures
Offsets negative externalities by making socially desirable outputs cheaper.
5. Disadvantages of Subsidies
Disadvantage
Explanation
Fiscal burden
Government must finance subsidies through taxation or borrowing, which can increase the budget deficit.
Risk of over‑production
Producers may supply more than the socially optimal quantity, creating dead‑weight loss.
Distortion of market signals
Artificially low prices can discourage innovation and efficiency.
Potential for rent‑seeking
Firms may lobby for subsidies without improving productivity, leading to misallocation of resources.
International trade issues
Subsidies can be challenged as unfair trade practices under WTO rules.
6. Evaluating Subsidies in a Mixed Economy
When assessing whether a subsidy is appropriate, students should consider:
Economic efficiency – does the subsidy move the market toward the socially optimal outcome?
Equity – who benefits and who bears the cost?
Fiscal sustainability – can the government afford the outlay without compromising other priorities?
Long‑term effects – does the subsidy encourage self‑sufficiency or create dependence?
7. Summary
A mixed economy uses both market mechanisms and government intervention to allocate resources.
Subsidies are a key tool for correcting market failures and achieving social goals.
While subsidies can increase output of desirable goods, they also carry costs and potential inefficiencies.
Critical evaluation requires weighing advantages against disadvantages in the context of limited resources.