3.7 Supply Side Polcies Flashcards
What are supply side policies
government policies which seek to increase the long-term productivity and efficiency of the economy
Goals of supply side policies
Promote long-term growth by increasing the productive capacity of the economy
Improve competition and efficiency
Reduce costs of labor and reduce unemployment through greater labour flexibility - more flexible labour means making labour market more responsive to market forces of demand and supply so as to reduce unemployment and labour costs
increase incentives of firms to invest in innovation by lowering production costs
reduce inflation to improve international competitiveness
2 types of supply side policies
Market based supply side policies
Interventionist supply side policies
What are groups which market based supply side policies can be placed under
Encouraging competition
Labour market reforms
Incentive-related problems
Give examples of markets based supply-side policies focused on encouraging competition
Privatization
Deregulation
Trade liberalization
Anti-monopoly regulation
Explain the market based supply side policy of Privatization
Involves transfer of ownership of a firm from the public to the private sector - increase efficiency due to improved management of privatized firm
Explain market based supply side policy of deregulation
Involves elimination or reduction of government regulation of private sector activities
Allows new private firms to enter monopolistic or oligopolistic industries, forcing firms to face competition
This increases efficiency due to lower costs and improved quality
Explain the market based supply side policy of trade liberalization
International trade between countries becomes freer due to reduction of trade barriers
This increases competition between firms both domestically and globally - increasing efficiency
Explain the market based supply side policy of anti-monopoly regulation
Restricting marker power of firms by enforcing anti-monopoly legislation, done by:
- breaking up large firms that have been found to engage into smaller units that will behave more competitively
- preventing the mergers between firms that may result in to much market power
Give examples of markets based supply-side policies focused on labour market reforms
reducing the power of labour unions - wages will be more responsive to supply and demand, more likely to fall if there is unemployment
reducing unemployment benefits - people remain unemployed from longer, reducing it will lower unemployment, encourage employment
abolishing minimum wages - lower unemployment (firms employ more as is cheaper), greater firms profits, more investment and economic growth
Give examples of markets based supply-side policies focused on labour market reforms
personal income tax cuts - lead to higher after-tax incomes, creating incentive for people to provide more work
cuts in business tax and capital gains tax - increase level of after-tax profits, firms have greater financial resources for investment
Examples of interventionist supply-side policies
Investment in human capital: Education and health services
Investment in infrastructure
investment in new technology: research and development
Industrial policies
Explain interventionist supply side policy of investment in human capital
Education:
- better training and education improves quality of labour, increasing productivity
- make workers more employable, reducing unemployment
Health care:
- workers given better access to healthcare, become healthier and more productive
- leads to improvements in quality of labour
Explain interventionist supply side policy of investment in infrastructure
Investment in roads, transport, airports, irrigation systems etc
Better infrastructure increased efficiency in production as it lower production costs, improves labour productivity
Explain interventionist supply side policy of investment in new technology
R&D results in new/improved capital goods
Explain interventionist supply side policy of industrial policies
Support the growth of the industrial sector in the forms of:
- support for small and medium sized enterprises or firms - e.x tax exemptions, low interest loans - more employment possibilities, more capital formation, more efficiency
- support of infant industries - receive support in firms of grants, subsidies, tax exemptions etc
Demand side policies link to supply side policies
Government spending in demand-side policies in industries for example infrastructure, healthcare or education will lead to an effect on LRAS
Constraints on market-based supply-side policies
Time lags - effect on supply side of economy over long term - as activities need time to materialize
Equity issues - greater competition may have a negative effect if resulting in unemployment, resulting in loss of income
Possible interference of vested interests - vested interest are personal interests in something - marker-based policies affect particular stakeholders in ways which are not in their best interest
Strengths of market-based supply-side policies
Improve resource allocation - focus on improving the workings of the market system, which are expected to result in improved efficiency
May not burden the government budget - do not need government funds
Constraints on interventions supply side polices
Time lags - time needed for investments, new human and physical capital to take effect
Negative impact on the government budget - heavily based on on government spending, creating a deficit
Strengths of interventionist supply side policies
Direct support of sectors important for growth - government may select sectors to promote which is important for growth.
Ability to create employment - enable workers to acquire skills and training
