LS13 - Supply Side Policies Flashcards
Supply Side Policies
Policies used to improve the quality and quantity of FaoPr, in order to improve LRAS
By improving labour productivity, efficiency, and capital
Can be market based or interventionist
Market based - allows markets to work more freely; ex: remove barriers which stop market from operating efficiently
Interventionist - policies that require govt intervention; ex: govt initiatives, such as skills and training support
Interventionist SSPs
- Investment into human capital - education and health services – training and education, improved health care and better access –> improves the quality and quantity of labour, and improves productivity. Govts can increase funding to improve quality of teaching; training programmes to boost skills, reducing employment, subsidies and grants to firms
- Investment into new technology - R&D in new technologies - new or improved capital – increases output, economic growth. Govts can give subsidies to firms which can be used to invest in capital to improve output
- Investment in infrastructure - more and better infrastructure can reduce costs, increasing efficiency - better roads, railways means better transport of goods and services, and more labour productivity
- Support for SMEs and infant industries - govt supports small and medium firms and new industries by tax exemptions, grants/subsidies, low interest loans, guidance, etc - better private sector, encourages more enterprise, increases AD
Market based SSPs
Creating conditions for market to work freely and efficiently - encouraging competition, labour market reforms, incentive related policies
Market based SSPs - Encouraging competition
Greater comp means more productivity and efficiency, trying to improve quality of g/s, and reducing costs - uses spare capacity and becoming more productive - potential output rises, LRAS rises
* Privatisation - firms transferring from public to private sector increases productivity, due to improved management and moving away from govt related hiccups - bureaucratic affairs, high admin costs, unproductive workers - private secotr has profit motive and competition so more efficient
* Deregulation - reduction of govt regulation in private sector to make it easier for firms to enter the market, increasing efficiency and competition
* Private financing of public sector projects, contracting to private sector
* Restricting monopoly power - improving comp and efficiency by regulating against monopolistic practices - lower costs and higher productivity
Market based SSPs - Labour market
Making labour markets more competitive by reducing labour costs, more revenue for firms to invest in capital or more employees to improve efficiency
* Abolishing min wage - firms more likely to hire more people, as labour costs are lower; wages respond to changes in markets; more firms profits
* Weakening power of labour unions - unions are mostly successful in getting higher wages, and reducing their influence - more wage flexibility
* Reducing unemployment benefits - benefits have uninteded consequences of reducing incentive of seeking employment - reducing benefits encourage looking for work, reducing unemployment
* Reducing job security - makes it more easier and cheaper for firms to let go of workers that are inadequate, increasing productivity; lowers labour costs for firms
Market based SSPs - Incentive related policies
- Lowering income taxes - cuts in tax leads to more take home income creating incentive for people to find work - reduces unemployment, increases hours worked – increases LRAS
- Lowering taxes on capital gains and interest income - lowering taxes on returns from financial assets (stocks, property), and reducing taxes on savings interest returns - increases investment and saving for further investment - increases LRAS
- Lowering business taxes - increases investment spending as firms have more revenue to spend on capital, or labour - greater potential output
