5.2 Supply-side policies Flashcards
1
Q
Definition & Aim of Supply-Side Policies?
A
- Aim to improve the long run productive potential of the economy.
- The economy can experience supply-side improvements in the private sector, without
government intervention. - For example, there could be improvements in productivity,innovation and investment.
2
Q
What are the strengths of Supply-Side Policies?
A
- Supply-side policies are the only policies which can deal with structural unemployment-because the labour market can be directly improved with education and training
- They boost LRAS and potential growth
- Can help reduce economic inactivity (economic inactivity rose from 20%-22.1% after covid) by GS on education and training, healthcare, childcare, lower income tax, lower benefits which provide an incentive to work
- Can help reduce the NRU through GS on education, infrastructure, lower income tax, lower benefits, lower strength of TUs and deregulation
- Increase competitivness and productivity this can help reduce the CAD
- Improve regional growth
3
Q
What are the limitations of Supply Side Policies?
A
- There are significant time lags associated with supply-side policies.
- Market-based supply-side policies, such as reducing the rate of tax, could lead to a more unequal distribution of wealth.
- Demand-side policies are better at dealing with cyclical unemployment, since they can reduce the size of a negative output gap and shift the AD curve to the right.
4
Q
Free-Market based policies
A
- limit the government intervention
- allow the free market to eliminate imbalances.
- The forces of supply and demand are used
5
Q
Interventionist policies
A
- rely on the government intervening in the market to improve market failure
6
Q
Why are free-market supply-side policies used?
IPR
A
- To increase incentives
- To promote competition
- To reform the labour market
7
Q
What does it mean to increase incentives?
A
- Reducing income & corporation tax to encourage spending and investment
- This could increase the long run productive potential of the
economy, (especially if labour and capital becomes more productive). - This improves the underlying trend of economic growth
8
Q
What does it mean to promote competition (free-market)?
A
- By deregulating or privatising the public sector, firms can compete in a competitive market
- This should also help improve economic efficiency and welfare
- This is because firms in the private sector have a profit incentive which nationalised firms do not
9
Q
What does it mean to reform the labour market (free-market)?
A
- Reducing the NMW will allow free market forces to allocate wages and the labour market should clear
- Reducing trade union power (makes employing workers less restrictive, increases the mobility of labour)
- This makes the labour market more efficient
10
Q
Give some examples of free-market supply-side policies
Puppy Dogs In France Run
A
- Privatisation-state owned assets are transferred to the private sector which improves incentives
- Deregulation-allows new firms to enter the market which creates competition
- Income tax cuts-greater incentive to work longer hours
- Flexible labour markets-reduce power of trade unions e.t.c
- Reduce welfare benefits-increase incentives to get a job
11
Q
Why are Interventionist Supply-Side policies used?
PRII
A
- promote competition
- reform the labour market
- improve the skills and quality of the labour force
- improve infrastructure
12
Q
What does it mean to promote competition (interventionist)?
A
A stricter government competition policy could…
- help reduce the monopoly power of some firms
- it ensures smaller firms can compete too.
13
Q
What does it mean to reform the labour market (interventionist)?
A
- Governments could try and improve the geographical mobility of labour by…
- subsidising the relocation of workers
- improving the availability of job vacancy information.
14
Q
What does it mean to improve skills and quality of the labour force?
A
- The government could subsidise training or spend more on education.
-(lowers costs for firms, since they will have to train fewer workers). -
Spending more on healthcare,
-(helps improve the quality of the labour force, contributing towards higher productivity).
15
Q
What does it mean to improve infrastructure?
A
- Governments could spend more on infrastructure, such as improving roads and schools.
