3.7 Supply Side Polcies

Question 1

What are supply side policies

Answer 1

government policies which seek to increase the long-term productivity and efficiency of the economy

Question 2

Goals of supply side policies

Answer 2

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

Question 3

2 types of supply side policies

Answer 3

Market based supply side policies

Interventionist supply side policies

Question 4

What are groups which market based supply side policies can be placed under

Answer 4

Encouraging competition

Labour market reforms

Incentive-related problems

Question 5

Give examples of markets based supply-side policies focused on encouraging competition

Answer 5

Privatization

Deregulation

Trade liberalization

Anti-monopoly regulation

Question 6

Explain the market based supply side policy of Privatization

Answer 6

Involves transfer of ownership of a firm from the public to the private sector - increase efficiency due to improved management of privatized firm

Question 7

Explain market based supply side policy of deregulation

Answer 7

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

Question 8

Explain the market based supply side policy of trade liberalization

Answer 8

International trade between countries becomes freer due to reduction of trade barriers

This increases competition between firms both domestically and globally - increasing efficiency

Question 9

Explain the market based supply side policy of anti-monopoly regulation

Answer 9

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

Question 10

Give examples of markets based supply-side policies focused on labour market reforms

Answer 10

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

Question 11

Give examples of markets based supply-side policies focused on labour market reforms

Answer 11

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

Question 12

Examples of interventionist supply-side policies

Answer 12

Investment in human capital: Education and health services

Investment in infrastructure

investment in new technology: research and development

Industrial policies

Question 13

Explain interventionist supply side policy of investment in human capital

Answer 13

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

Question 14

Explain interventionist supply side policy of investment in infrastructure

Answer 14

Investment in roads, transport, airports, irrigation systems etc

Better infrastructure increased efficiency in production as it lower production costs, improves labour productivity

Question 15

Explain interventionist supply side policy of investment in new technology

Answer 15

R&D results in new/improved capital goods

Question 16

Explain interventionist supply side policy of industrial policies

Answer 16

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

Question 17

Demand side policies link to supply side policies

Answer 17

Government spending in demand-side policies in industries for example infrastructure, healthcare or education will lead to an effect on LRAS

Question 18

Constraints on market-based supply-side policies

Answer 18

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

Question 19

Strengths of market-based supply-side policies

Answer 19

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

Question 20

Constraints on interventions supply side polices

Answer 20

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

Question 21

Strengths of interventionist supply side policies

Answer 21

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