By: Shreya Challa, Kavya Pothapragada, Rakshek Vasu, Chetana More and Purvi Reddy, 11A

A mixed economy is one where the private sector has the freedom to decide the price of goods and services with respect to demand and supply forces. However, the state still has the authority to intervene if the welfare of its citizens is compromised.

An entrepreneur is someone who organizes the other factors of production- land, labor and capital- and takes risks. They are part of the private sector.

Efficient allocation of resources

An entrepreneur is likely to efficiently allocate resources in order to ensure their firm does not incur losses. In order to do this, they take into account the price mechanism wherein demand and supply forces establish a market price, which allows them to distribute the factors of production efficiently. This reduces resource wastage and ensures that all resources are fully employed in production. This is due to the carrot and stick theory, which is caused by the price mechanism.

However, this strategy will not work in markets where a firm has established itself as a monopoly because demand for their product is relatively inelastic leading to an abuse of market power. The government can prevent this through central planning. This is because the government has oversight over a variety of sectors which could give them unique comprehensive information regarding a market and the price at which to sell goods and services and on how to allocate resources efficiently.

Innovation

Additionally, the entrepreneurs may be more innovative than the government since their main aim is profit. They may be more willing to lower the cost of production and increase the use of technology as well as introduce new products. This innovation may come in his form of specialization wherein entrepreneurs can choose to specialize in one good and export this good to another country. This will help the firm gain revenue and the economy may have a current account surplus. The increase in revenue for firms will lead to and increase in supply, leading to economic growth due to rise in GNI (Gross national income).

However, the government can provide tax breaks and subsidies to domestic and international firms leading to a fall in the cost of production as well as greater investment in specialization and innovation.

Profit Motive

Entrepreneurs, since their main incentive is profit, may want a larger market share, thus they may be more competitive and drive down their prices to increase demand. This benefits the consumer who will pay lower prices for goods and services.

Although they may produce more in order to earn more profits, they may choose production practices that may be immoral or have negative externalities and harm consumers. Whereas, the government has a mandate to protect the welfare of the people.

On the other side, the government works for the welfare of the people, lowering prices and generating more employment, raising living standards and aggregate demand, which leads to economic growth and development in the long run.

Conversely, due to the lack of profit incentive, they lack efficiency and hence the goods and services they provide may not satisfy the demand of consumers or may be of poor quality.

Natural Monopoly

Another advantage is that the government, when producing goods and services, may prevent wasteful duplication of good, in which firms may compete to produce goods, but may not be that efficient as other firms. If the public sector becomes a natural monopoly, prices would be low and this wasteful duplication, which may occur with entrepreneurs, would not occur.

However, natural monopolies may not be very efficient due to lack of incentive and may lead to lack of product diversity and poor quality of goods and services. For instance, the Indian railways are a natural monopoly and have many problems due to mismanagement that often even lead to the loss of human life. Unfortunately, consumers lack alternatives and are forced to demand these services.

Health and Welfare of the people

Most governments have a mandate to protect the welfare of their citizens. This translates to the government ensuring a minimum level of unemployment and lower cost for essential goods, unemployment benefits and pensions. All of this aids in improving the standard of living and aggregate demand in the economy leading to economic growth. Private firms lack this incentive and prioritize their profits over the welfare of their employees or consumers. Private firms do not give unemployment benefits. For example, Chrysler and GM took risky decisions that led to a loss in revenue and risked the jobs of thousands of their employees; the state intervened and bailed these firms out, protecting the livelihoods of their citizens.

Against this, private firms will attempt to attract employees by providing fringe benefits, good working conditions and high salaries.

Government intervention

The government also ensures that there is no market failure by taxing or breaking up monopolies, subsidizing or providing merit goods and providing pollution permits. They can also intervene in the market through fiscal policies. With expansionary fiscal policy, the government may reduce taxes and increase government expenditure to raise spending and employment, increasing aggregate demand, GNI and economic growth. This may have a more widespread effect than any actions taken by entrepreneurs

However, if a firm has a large influence on the political decisions, they may attempt to benefit from or influence the decisions taken by the government.

In conclusion, entrepreneurs can drive economic growth by increasing production efficiency, allocating resources according to the consumers’ wants and being more competitive. However, the government can employ many policies, prevent wasteful duplication, and encourage employment as well as providing goods and services that are beneficial, but may not be profitable. A good balance would be in a mixed economy where the government has a presence in the market to rectify market failure and can help control demand and supply to some extent, but entrepreneurs are also encouraged.