2.6.3: Supply-Side Policies

Question 1

What are market-based policies?

Answer 1

Policies that remove barriers to efficient working of free markets.

Question 2

What are interventionist policies?

Answer 2

Policies that correct market failure by intervening in free markets.

Question 3

What are the 5 desired effects of supply-side policies?

Answer 3

-Increase incentives.
-Promote competition.
-Reform labour market.
-Improve labour force quality.
-Improve infrastructure.

Question 4

How do supply-side policies increase incentives?

Answer 4

-Reduction of taxes increases the opportunity cost of not working.
-Results in an increase in the size of the workforce.
*Income effect- more hours.
*Substitution effect- less hours.

Question 5

How do supply-side policies promote competition?

Answer 5

-Necessary to make firms efficient, as they have to offer a cheaper or better service.
-Used to prevent monopolies and make price fixing agreements illegal.

Question 6

How do supply-side policies reform the labour market?

Answer 6

-A rise in the minimum wage will cause increased unemployment.
-The reduction of benefits will also increase incentives to work and help reform the labour market.

Question 7

How do supply-side policies improve labour force quality?

Answer 7

-An increase in high skilled workers would improve the quality of the workforce.
-More spending on education and training would create a more educated workforce who will be more efficient.

Question 8

How do supply-side policies improve infrastructure?

Answer 8

-Tax incentives or subsidies on investment.
-Improvements in technology results in more productive efficiency.

Question 9

What are strengths to supply-side policies?

Answer 9

-Increases output and decreases prices in the long term.
-Deals with structural unemployment, as education and training can improve the labour market.
-Can improve balance of payments (if focused on increasing exports).

Question 10

What are weaknesses to supply-side payments?

Answer 10

-Market-based policies (e.g. reducing the rate of tax) results in an unequal distribution of wealth.
-Time lags.
-No effect if LRAS is elastic (spare capacity).

Question 11

What is an example of interventionist policies?

Answer 11

Investment in production.

Question 12

What is an example of market-based policy?

Answer 12

Privatising the public sector.