How are the basic problems solved in a mixed economy?

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In a mixed economy the central problems are solved by combining central planning with a modified price mechanism.

(i) The problem of what to produce is solved through price mechanism and planning. The market price controls the private sector and in the public sector the planning agency decides what to produce and administers the prices.

(ii) The profit motive decides how to produce in the private sector. In the public sector the decision is made on the basis of the welfare motive.

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(iii) Some of the goods that are produced are distributed in the market on the basis of price mechanism and some are distributed by the government through the public distribution system.

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