Government in the Modern Mixed Economy
Economy
Market economies in today’s advanced industrial countries are based
primarily on voluntary transactions between individual buyers and
sellers. Private individuals have the right to buy and sell what they want,
to accept or refuse work that is offered to them, and to move where they
want when they want. However, some of the most important institutions
in our societies govern the transactions between buyers and sellers.
Key institutions are private property and freedom of contract, both of which must be
maintained by active government policies. The government creates laws of ownership and
contract and then provides the institutions, such as police and courts, to enforce these laws.In modern mixed economies, governments go well beyond these
important basic functions. They intervene in market transactions to
correct what economists call market failures. These are well-defined
situations in which free markets do not work well. Some products, called
public goods, are usually not provided at all by markets because their use
cannot usually be restricted to those who pay for them. Defence and
police protection are examples of public goods. In other cases, private
producers or consumers impose costs called externalities on those who
have no say in the transaction. This is the case when factories pollute the
air and rivers. The public is harmed but plays no part in the transaction.
In yet other cases, financial institutions, such as banks, mortgage