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Thursday, January 27, 2011

Discuss whether a mixed economy is the best way to deal with the basic economic problems.

An economy, as it has limited resources, faces 3 basic economic problems generally referred as problems related to what to produce?, how to produce? And to whom to produce? These problems are also called problems related to resource allocation.
Similarly, mixed economy is an economy having combined features of two extreme economies, market economy and planned economy. All firms and industries are owned by private sectors in market economy and are also free to decide issues related to resource allocation. Whereas all firms and industries are owned by government in planned economy and therefore are decider of problems. Within these two extreme cases, mixed economy emerges which decides major problem related to resource allocation by the principle of PPP(Public Private Partnership). Hence mixed economy is the best way to deal with the basic economic problems since it combines best features of both economies. Here are some basic economic problems and contribution of economies to solve those problems.
What to produce?
Since an economy has limited resources, it cannot produce all the goods demanded by people. So economies have to decide it what to produce. In market economy, entrepreneur may decide to produce those goods from which they can get maximum profit without considering what will be its effect in society. Hence increase in demerit goods may be resulted. Under production of merit goods will be felt. Moreover class conflict will also occur due to varieties of goods available in market.
Whereas in planned economy government will decide to produce merit goods from which society will be more benefited. It may discourage entrepreneur to produce innovative products. Sovereignty of consumers also seems to be lost in planned economy. Since there will not be much more difference between rich and poors, red tapism is feared. But these problems are rectified by mixed economy. Private sectors will be producing goods demanded by public and government will be controlling disorders. There will be well understanding between two poles. It will make resource allocation more easier.
How to produce?
Problem related to how to produce? Is related to methods of production generally referring to labor intensive and capital intensive. In planned economy government might encourage to choose labor intensive since government is much more concerned with providing more employment opportunities. But in market economy private sectors may choose machines which have more efficiency and productivity than labor forces. It may create unemployment problem.
these problems are solved by mixed economy because government restricts number of people to be employed. So private firms will be able to use machines employing certain people.
To whom to produce?
Government of planned economy discourage firms to produce varities of goods. But in market economy class conflict will be felt due to variety of goods. These problem are unseen in mixed economy.

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