Mixed economic system

A pure market economy would not supply public goods, would under-provide merit goods and over-provide demerit goods, would ignore pollution, and would leave the poorest without essentials. A pure planned economy loses the incentives and information that prices provide. Every real economy therefore combines the two: private firms produce most goods, while the government provides some goods directly, taxes or subsidises others, regulates markets and redistributes income.

The balance differs between countries and changes over time. Governments that want more efficiency and choice move towards markets; governments that want more equality or security move towards intervention. Debates about healthcare, railways and energy are debates about where the balance should lie.

A maximum price (price ceiling) is a legal limit set below the equilibrium price to make a good affordable — rent controls and caps on bread or fuel prices are examples. At the lower price quantity demanded extends and quantity supplied contracts, creating a shortage. Some buyers gain lower prices; others go without, queues form, and black markets can appear.

A minimum price (price floor) is set above equilibrium to protect producers or workers — a guaranteed price for farmers or a minimum wage. Quantity supplied extends and quantity demanded contracts, creating a surplus: unsold crops the government may have to buy, or unemployment among workers the firms no longer hire. Minimum prices on demerit goods such as alcohol are used to cut consumption.

An indirect tax is a tax on spending, collected from the seller — VAT, duties on fuel, tobacco and alcohol. It raises producers' costs, so supply shifts left: price rises, quantity falls. Governments use it to raise revenue and to discourage demerit goods and polluting products. Part of the tax is paid by consumers through the higher price and part by producers through lower net receipts; how much falls on each depends on elasticity.

A subsidy is a payment from the government to producers, lowering their costs: supply shifts right, price falls and quantity rises. Subsidies encourage merit goods such as public transport and vaccination, support industries such as farming, and reduce prices of essentials. Their opportunity cost is the tax revenue used, and they can keep inefficient firms alive.

Regulation uses rules rather than prices: bans on dangerous products, age limits, pollution standards, safety laws, competition law. It is direct and can be targeted, but it needs enforcement and can raise firms' costs. Direct provision means the government produces or pays for a good itself — state schools, public hospitals, street lighting, defence — financed from taxation. It guarantees access regardless of income, but the opportunity cost is large and the quantity provided is decided by politics rather than demand.

Nationalisation is the transfer of a private firm or industry to state ownership; privatisation is the reverse. Supporters of nationalisation argue the state can run natural monopolies such as water and rail in the public interest, provide loss-making but socially valuable services, and avoid private monopoly profits. Supporters of privatisation argue private owners have stronger incentives to cut costs and innovate, that sale raises revenue, and that competition improves quality. The evidence is mixed, which is why both occur.