2.6.7 Supply side policies Flashcards
Supply side policies
Policies that improve the productive potential/ capacity for an economy.
Market based methods
Policies designed to remove barriers that prevent the free market working efficiently.
Interventionist based methods
Policies designed to correct market failure.
Market-based and interventionist policies: Increase incentives
Incentive for people to work:
-Reduction of benefits, increases the opportunity cost of being out of work, meaning people will be better in work than on benefits.
-Reduction in benefits may reduce the poverty/unemployment trap.
-Encourage parts of the workforce to go back to work
e.g. women could be offered free childcare.
Incentives for firms to employ:
-Firms have to pay national insurance contribution when they take on new employees, reducing these taxes would incentivize firms to employ.
-A reduction/removal of minimum wage would increase the incentive of firms to employ.
Market-based and interventionist policies: Promote competition
Privatisation - selling state owned assets to the private sector.
Deregulation - reducing barriers to entry to allow new firms in the market.
E.g. BT used to be a monopoly is telecommunications but now has several other firms competing such as virgin.
Competition policy - prevents monopolies in the market and makes cartels and price fixing agreements illegal.
E.g. Competition Act 1998 and Enterprise Act 2002 were legislated with the same aim.
Market-based and interventionist policies: reform the labour market:
-Increasing retirement age, there will be more people working and so more goods and services can be produced.
E.g. Predicted to rise to 71 in 2050 from 66 in 2024.
-The labour market could become more flexible.
Market-based and interventionist policies: improve infrastructure
-Increased government spending on transport and roads, increases productivity and efficiency as less time is wasted through excessive travel times.
Market-based and interventionist policies: improve skills and the quality of workforce
-Increase spending on education and training to create a more educated workforce, more efficient and able to do skilled jobs, increasing the number of goods and services produced.
E.g. T-levels have been introduced by the government to as an a-level equivalent which focuses on technical education.
-Introduce regulation
Evaluation of supply side policies:
-Unlike demand side policies, supply side policies can increase output and decrease prices. They are long term and lead to long term economic growth, rather than just small changes in economic growth, following changes in AD.
Evaluation of supply side policies: Time lags
Supply side policies can have long term time lags. These time lags occur between the time the policy is implemented and when it starts taking effect. But that depends on the type of policy and country involved.
Evaluation of supply side policies: Impacts on equity
Some supply side policies may lead to greater inequalities of income and wealth. But this depends on which taxes are changed.
E.g. reducing higher income tax rates.
Evaluation of supply side policies: Impact on environment
