What are the advantages & disadvantages of a mixed economy?

Written by kristin jennifer
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What are the advantages & disadvantages of a mixed economy?
Concern for small business owners was at the heart of early U.S. government intervention in the economy. (Michael Blann/Digital Vision/Getty Images)

The economy of the United States is a "mixed" economy; i.e., one that combines capitalism with various forms of government regulation. Pure capitalism entails free interaction between business and customers. However, since the late 19th century, the U.S. government has been intervening in markets and industries in various ways. This intervention has brought both advantages and disadvantages to the economy.

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Free Markets

Free markets allow businesses to provide needed goods and services to customers without regulatory hinderances. Producers can freely assess the resources available and meet customers' needs in exchange for a price, whether that be in currency or trade. In its pure state, a free market allows producers to creatively use available resources to address and anticipate customer needs. It also enables manufacturers to enter the market easily to produce a better or more efficient product. Ideal free markets allow creativity to flourish and die according to consumer demand.

Not Always So Free

In reality, free market capitalism has a tendency to form into monopolies or oligarchies, in which one or a few companies dominate a given product or service market. Monopolies and oligarchies prevent new businesses and products from entering the market. As such, free markets left without government intervention may stifle the creativity of entrepreneurs and encourage inefficient use of resources. Monopolies have control over the price set for a product and are less subject to "market forces" that reflect the proper balance between selling price and what customers are willing to pay. Governments regulate the formation of monopolies and oligarchies to stimulate efficiency and creativity in the marketplace by supporting entrepreneurs.

Consumer Protections

In 1906, Upton Sinclair's gruesome depiction of business practices in a Chicago slaughterhouse in his novel "The Jungle" inspired the passage of the federal Pure Foods and Drugs Act. Up to that point, many businesses operating in an unregulated market were not preparing food safely for customers. Government regulation was needed to ensure the public trust. The U.S. Food and Drug Administration to this day conducts safety inspections of all food production and handling facilities. Similarly, clean water and clean air legislation has been passed to protect the public welfare.

Government Overregulation

Government oversight helps consumers ensure that businesses are not operating against their best interests. However, government regulation of business has the potential to stifle the very creativity and efficiency that some regulations are designed to protect. The level of regulatory requirements on factories and refineries in a given industry may raise the cost of business so high that only one or a few businesses may remain and no entrepreneurs can enter the market. Also, some consumer protections may prevent the emergence or availability of useful medications or technologies.

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