2.6.3 Supply Side Policies

Question 1

What are the two types of supply side policies?

Answer 1

• market based = demand + supply, price mechanisms to allocate resources, less govt intervention = promotes the use of the markets to allocate resources e.g. improving incentives
• interventionist = govt intervention e.g. regulation, govt spending + taxation, subsidies

Question 2

Example of an interventionist supply side policy?

Answer 2

• the government increases its spending on the big three e.g. education, health + infrastructure
• e.g. infrastructure = roads, rails, airport etc
• in the longer run increases LRAS
• also causes a rightward shift of AD in the first instance —> multiplier effect —> increase in real gdp

Question 3

Example of market based supply side policies

Answer 3

• deregulation = reduce barriers for more competitive markets
• privatisation = increase in competition e.g. success of telecommunications industry
• reduce protectionism = encourage international trade, increased competition in international markets
• reduce monopolies = CMA investigates firms acting in an anti-competitive manner

Question 4

How does deregulation improve competition?

Answer 4

• allows more businesses to enter the market = makes market more contestable = lower barriers to entry
• competition gives producers an incentive to produce better quality goods or at a lower cost so cheaper goods = increased consumer surplus
• more efficient allocation of resources + offers customers more choice

Question 5

Benefits of competition

Answer 5

• firms have a greater incentive to be more efficient if they are in competitive markets
• incentive to be productive efficient = lower average costs so they can lower prices
• incentive to be allocatively efficient = producing good that consumers want = higher quality, more innovative

Question 6

What can market based policies aim to do?

Answer 6

• increase competition
• increase incentive

Question 7

How can a market base policy increase incentives?

Answer 7

• reducing corporation tax = increased incentive for firms to invest in capital goods + encourages FDI
• reducing income tax, reducing benefits = increased incentive for individuals to work, reduces voluntary unemployment
• HOWEVER - increasing incentives can come at the cost of increased inequality

Question 8

Interventionist policy to improve skills + quality of labour force

Answer 8

• spending on education, training + health = increased productivity in the longer run + improve occupational mobility
• improved training management = organising work + recruitment, provides motivation
• increased number of apprenticeship programmes

Question 9

Interventionist policy to improve quality of labour EVALUATION

Answer 9

• policy could be costly = increased budget deficit —> in the long run govt May have to increase taxation and/or lower spending = opportunity cost
• impact would depend on the extent to which the training was suitable for preparing people for the workforce = needs to address skills shortages

Question 10

Market based policies to reform the labour market

Answer 10

• reduce trade union power = reduces ability of workers to negotiate higher wages + therefore wages will be lower than if trade unions are stronger
• labour force may be more flexible with less trade union power due to unions instructing members to only perform roles as defined in contrast = demarcation disputes
• making laws to allow immigration to be easier (especially for professions with skill shortages) = increased supply of skilled workers = fall in equilibrium wage = UK goods more competitive = export led growth

Question 11

Market based policies to reform the labour market EVALUATION

Answer 11

• could lead to increased income inequality if wages are suppressed while income rise for highest earners
• greater immigration means higher demand for education, health + housing = more govt spending
• more demand for road space = increased congestion e.g. negative externalities

Question 12

Interventionist policy to improve infrastructure?

Answer 12

• increased govt spending on infrastructure e.g. public transport, roads etc
• improves geographic mobility
• workers have a simpler commute to work = more flexible work force

Question 13

Disadvantages of interventionist supply side policies

Answer 13

• cost to govt, increased spending on education, health + infrastructure could lead to a budget deficit
• cuts in taxation could lead to lower tax revenue = budget deficit
• policies to encourage FDI will only be impactful in the long run = no immediate benefit
• spending on education + training will also have a time lag until it creates a skilled workforce read to work

Question 14

Disadvantages of market based supply side policies

Answer 14

• boosts to incentives could lead to more inequality if benefits are cut
• BUT cuts in income tax for basic rate payers or increase in personal allowance + minimum wage could reduce inequality