4.5 supply side policy Flashcards
What are supply side policies
Supply side policies are microeconomic policies aimed at increasing supply and productivity in the economy
What to supply side policies aim to do
In the long run - they aim to achieve almost all the macroeconomic objectives of the government at the same time
What are the 2 broad types of supply side policies
Market based
Interventionist
What are the market based supply side policy
what are the goals of market based supply side policy
Supply side policies that apply to the full market ( firms and consumers)
Encourage competition
Labour market reforms
Incentive based policies
Why does a govt aim to increase competition in a market
What are the 3 ways they can do they
Why?
Increased efficiency
Reduced costs
Improved resources allocation
More options for customers
methods:
Privatization
Deregulation
Trade liberalization
What is privatization
Transfer of ownership of a firm from the public sector to the private sector
Why do governments use privatization?
disadv
The main object of private sector firms is profit, compared to the main objective of public sector firms which is social welfare
This leads to private sector firms being more efficient, delivering goods at a lower cost and better quality. This is better for society.
may lead to market failure - underprovision of merit goods, etc.
What is deregulation
what does it do
what does it lead to
The removal of rules and regulations
Reduces barriers to entry into a market and helps remove burdens on business which reduce their production costs and free up resources.
Increased competition
Better allocation and use of resources
Increased output and efficiency
Why are the removal of trade barriers a supply side policy
Imports - Govts can reduce taxes on imports so that more resources, goods and services may be imported. This increases competition in the market hence productivity and efficiency in the domestic economy increase.
Exports - Can reduce export duties to increase export of resources, goods and services to other nations, thereby encouraging domestic firms to increase production. Leads to economic growth and employment
Why do the governments aim for labour market reforms
what are the reforms? (there are 4)
The governments want to increase the flexibility in the labour market
reforms:
Abolishing/reducing minimum wage
Reducing unemployment benefits
Reducing job security
reducing trade unions power
Why do governments aim to reduce or abolish minimum wage
disadv
lowers costs of production encourages firms to hire more workers as they are cheaper. Output and Employment increase
Firms could exploit their workers with this.
Why do governments give less welfare or unemployment benefits
this forces unemployed people to get a job which would increase employment and hence output
disadv:
people who are genuinely unable to find a job will suffer.
Why do governments reduce job security
how do they do this
disadv
There is an increase in productivity since only the most efficient employees are kept. This increases the supply of skilled. Quality of labour goes up therefore the PPC shifts outwards - economic growth.
They could do this by privatisng firms
disadv: could cause unemployment. Govt may have to pay for retraining and unemployment benefits
Why do governments decrease the power of the trade unions
disadv
wages can be decreased encourages firms to hire more workers as they are cheaper. Productivity would increase since there are less strikes.
Disadv - firms could start exploiting employees
What are the incentive based policies
Reducing cooperate tax
Lowering income tax
Why do governments reduce income tax from a supply pov
Motivates people to work harder (increased output) and encourages the unemployed to get a job. Increased productivity
Why do governments reduce cooperate tax
firms have more money to increase output or employ more people or invest in R&D of new efficient production processes
What are the main types of INTERVENTIONIST Supply side policies
Investing in labour
Investing in innovation
Industrial incentives
Additional policies
What are the internventionist supply side policies that invest in labour
Training and education
Healthcare services
Why is spending on education and training a supply side instrument
risk
Increasing government spending on education & retraining raises the quality of the workforce. Outward shift of the PPC.
People are more occupationally mobile - easier to get jobs. Reduces unemployment and increases productivity
risk:
outward migration would lead to no increased output/taxes from the worker for the economy
Why is spending on healthcare a supply side instrument
Increasing government spending on healthcare so that worker productivity improves.
Less sick days - higher output
Why do governments invest in R&D
Leads to many positive externalities.
Production and efficiency increases. This leads to an increase in supply (higher output = more employment). This leads to a decrease in price which leads to an increase in agg demand. Therefore there is economic growth
Why and how would governments provide industrial incentives
give definitions
Subsidies - A non-repayable sum of money given by the govt to firms on certain conditions
Can be used by the govt to encourage growth and production in certain industries. Along with encouraging firms to do certain actions eg investing in r&d, etc.
What are the 2 additional interventionist supply side policies
Investing in infrastructure
Investing in housing
Why would governments invest in infrastructure
Investments in infrastructure such as transport and communication can greatly help the economy by making the flow of resources quick and easy, and facilitate faster growth.
Why would governments invest in housing
as more housing spaces are built, the geographical mobility of the population will increase, helping increase output.
What are the benefits of supply side policy
Increased labour productivity
Reduce unemployment
Reduce inflation
Economic growth
Increase Competition
Improves balance of payments
Disadv of supply side policies
They are ineffective in the short term
Interventionist supply side policy involve significant public expenditure which places pressure on the government budget. Along with this tax cuts also means less revenue which puts more pressure on the budget.
Can reduce equity. Labour market reforms can lead to exploitation
Deregulation in certain industries can lead to negative effects on the environment
Definition of productivity
is a measure of how effectively the economy can use a set of inputs to create a volume of outputs.
