Economics Mixed Economy Questions Medium
A mixed economy addresses externalities through a combination of market mechanisms and government intervention. Externalities refer to the costs or benefits that are incurred by individuals or society as a result of economic activities, but are not reflected in the market prices.
In a mixed economy, the market plays a significant role in addressing externalities. Through the price mechanism, the market signals the costs and benefits associated with economic activities. When there are negative externalities, such as pollution or congestion, the market prices do not fully capture the social costs. In such cases, the government intervenes by imposing taxes or regulations to internalize the external costs. For example, a carbon tax can be imposed on industries emitting greenhouse gases to reduce pollution.
On the other hand, positive externalities, such as education or research and development, are not fully captured by market prices. In this case, the government may provide subsidies or grants to encourage these activities. For instance, the government may subsidize education to ensure a more educated workforce, which benefits society as a whole.
Additionally, the government may also establish regulatory frameworks and standards to address externalities. For example, environmental regulations can be implemented to control pollution levels or zoning laws can be enforced to manage land use externalities.
Overall, a mixed economy addresses externalities by combining market mechanisms with government intervention. This approach aims to internalize the costs and benefits associated with economic activities, ensuring a more efficient allocation of resources and promoting the overall welfare of society.