2.6.3 Supply-side policies

Question 1

Supply-side policies

Answer 1

Supply-side policies aim to improve the long run productive potential of the economy.

Question 2

Market based vs Interventionist methods

Answer 2

• Market-based policies: limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used.
• Interventionist policies: rely on the government intervening in the market.

Question 3

Market-based policies: supply-side policies

Answer 3

o To increase incentives
- Reducing income and corporation tax to encourage spending and
investment.
- Reducing benefits to increase the opportunity cost of being out of work
o Topromotecompetition
- By deregulating or privatising the public sector, firms can compete in a
competitive market, which should also help improve economic efficiency.
o To reform the labour market
- Reducing the NMW (or abolishing it altogether) will allow free market
forces to allocate wages and the labour market should clears.
- Reducing trade union power makes employing workers less restrictive
and it increases the mobility of labour. This makes the labour market more efficient.

Question 4

Interventionist policies: supply-side policies

Answer 4

o To promote competition
- A stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete, too.
o To reform the labour market
- Governments could try and improve the geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information.
o To improve skills and quality of the labour force
- The government could subsidise training. This also lowers costs for firms, since they will have to train fewer workers.
- They may spend more on education, such as university, so workers will be more skilled and efficient.
- Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity.
- This may help to reduce occupational immobility.
o Toimproveinfrastructure
- Governments could spend more on infrastructure, such as improving
roads and schools.

Question 5

AD/AS diagrams: supply-side policy

Answer 5

Both diagrams (Keynesian LRAS and Classical LRAS) show the effects of employing a supply-side policy. The LRAS curve shifts to the right, to show the increase in the productive potential of the economy. In other words, the maximum output of the economy at full employment has increased. This leads to a fall in the average price level, from P1 to P2, and an increase in national output, from Y1 to Y2.

Question 6

Strength of supply side policies

Answer 6

• Supply-side policies are the only policies which can deal with structural unemployment, because the labour market can be directly improved with education and training.

Question 7

Weaknesses of supply-side policies

Answer 7

• Demand-side policies are better at dealing with cyclical unemployment, since they can reduce the size of a negative output gap and shift the AD curve to the right.
• There are significant time lags associated with supply-side policies and not all policies will be successful.
• Market-based supply-side policies, such as reducing the rate of tax, could lead to a more unequal distribution of wealth.
• There may be negative impacts on the government budget due to higher government expenditure or lower taxes.
• Policies may impact AD before they impact AS and so they could have inflationary effects.
• If there is a lot of spare capacity in the economy, then supply side policies will have no impact. On the Keynesian curve, if the economy is producing on the elastic part of the curve, there will be no change in output following the policy.

Question 8

Supply-side policies synoptic point *

Answer 8

Some of these policies are aimed at solving microeconomic issues, for example under-performing monopolies, in order to improve a macroeconomic concept. If the economy is not successful at a microeconomic level, it will be unable to meet macroeconomic objectives.