One way in which economists characterize markets is according to the degree of inf luence that government has over them . A free market is one in which government has little or no influence . In a free market the key economic questions of what to produce, how and for whom will be decided mainly by interaction between individual consumers and private producers — usually business firms . Firms will respond to the demands or anticipated demands of consumers . However, where markets are not free , resource allocation usually becomes subject to some combination of influence by firms, consumers and government . State intervention in markets can take two broad forms: The state may elect to produce directly some goods and services itself in tandem with or instead of production by private firms . The state may choose not to produce goods and services directly in markets but to regulate markets in some way . There can be a wide variety of practice here . In the European Union agricultural production is heavily conditioned by financial subsidies paid by European governments to farmers . In fact , governments can and do choose to subsidize production by private producers in many markets . Conversely, instead of encouraging more production, governments may either try to limit what it considers to be harmful or undesirable forms of output, or it may seek to influence the quality of what is produced . Fig . 6 - 1 broadly summarizes these categories of free markets and markets subject to forms of state intervention . In Fig . 6 - 1 (a) the market is composed only of business firms and private consumers — it is a f ree market . In Fig . 6 - 1( b ) , the production side of the market is composed of both f irms and government . Here then the state has involved itself in the production of goods and services either alongside or , in some instances, perhaps instead of private f irms . In Fig . 6 - 1 ( c ) there is a layer of state regulation of the market as a whole . Using the illustrative categories in Fig . 6 - 1 , can we say what a “ real ” economy looks like — what is its typical form ?In fact , mixed economies will be typified by the presence of markets represented by all three of the panels (a) - ( c ) in Fig . 6 - 1 . Mixed economies are defined by the existence in terms of some combination of public and private resource allocation: both private f irms and government are involved in determining what society produces, how and for whom .Now, in the new millennium, most of the world ' s economies are like this, but prior to the late 1980s, economies in Eastern Europe and some in Africa and the Far East were centrally planned rather than mixed . This meant that there was relatively little room for private firms, and resource allocation was primarily determined by the state . Bureaucrats rather than business people decided what kinds of goods and services should be produced . They also decided how production would be organized, and controlled the way in which goods and services were distributed . Most of the old centrally planned economies are currently engaged in a process of transition to mixed status . This means that the influence of the state over resource allocation is being eroded in these economies and there are increasing opportunities for private f irms to actively participate in economic decision-making . So , the mixed economy is an arena in which key economic decisions are taken by business f irms, consumers and government . It is also important to note that these decisions are seldom taken in isolation . Under the general imperatives of consumer sovereignty, firms, consumers and government continually interact with one another across most markets in the mixed economy . In terms of Fig . 6 - 1 , this means that ( b) and ( c ) are most prevalent , with (a) — the free market — in reality quite rare.