Mixed economy is an economy where both private and public sectors coexist. It is rather a compromise between capitalism and socialism.
It works through the dual system of free price mechanism and economic planning (controlled price system).
In private sector of the economy, entrepreneurs are free to take economic decisions regarding basic problem on the basis of profit motive. In other words, private sector is regulated through free price mechanism.
But this mechanism is not given a free hand to operate as in capitalist economies. It has to work under the broad objectives laid by the state. In mixed economy, private sector is not purely regulated by free price mechanism but it is made to work through concessions and controls on the part of the government.
For example, if state wants an increase in the’ production of a commodity, it may announce certain concessions for it and can encourage private producers to produce more of that commodity. Similarly, through checks and controls, private sector of the economy can be discouraged.
Further, the state guides and provides various facilities to the private sector for adopting such techniques of production which may reduce cost and maximise output. As far as public sector is concerned, it is guided by the principle of social welfare. The decisions regarding basic problems, are taken through controlled price mechanism.
The Central Planning Authority decides the nature of goods and services to be produced. For consumer and capital goods, prices are fixed on the principle of ‘profit price policy’. For public utility services, like electricity, water, gas, communication etc., prices are fixed by the government on ‘no-profit-no-loss’ basis. The state decides for whom to produce in view of consumers, preference.