LS13 - Supply Side Policies Flashcards
Supply side policies
Policies designed to boost LRAS by increasing the quantity and/or quality of the factors of production or by improving the efficiency of labour and product markets
Market based policies
Policies that aim to allow markets to work more freely, and provide incentives for entrepreneurship and initiative.
Interventionist policies
Polices that tend to involve the government resolving what it believes to be market failures through increases in regulation and government spending.
Examples of interventionist policies
3 KEY PARTS. INCREASE EFFICIENCY, INCREASED PRODUCTIVE POTENTIAL, IMPROVEMENTS IN QUALITY/ QUANITITY OF LABOUR , INCREASING PRODUCTIVE EFFIECENCY, THIS INCREASING LRAS.
Government spending on education and training-
Increased government spending on education and training would increase the level of human capital and thus labour productivity. This would be a sign of an improvement in the quality of labour and also the fact that more goods and services could be produced in the same time period. This would increase the productive potential of the economy and so also cause LRAS to increase
Government spending on infrastructure-
Increased government spending on infrastructure is largely to do with the improvement of access to energy and improvement of transport links (e.g. roads, trains etc…). In the case of improvements in energy infrastructure, this is likely to reduce costs for firms in obtaining energy and may also result in a rise in efficiency. In the case of improvements in transport, this may improve transport conditions, making it cheaper and more efficient for firms to use supplier vehicles, and also for people to travel to schools, hospitals and to work in more distant places (which can further increase productivity). The increased efficiency of firms (higher productivity) will increase productive potential, and the increased ease of travelling for individuals is likely to lead to improvements in both the quality of labour (due to higher labour productivity) and possibly the quantity of labour (due to the geographically immobile people now entering the labour force), which would both also increase productive potential and thus LRAS
Incentives and Subsidies to firms to promote investment-
If the government encourages, supports and funds more science education in schools and science research in universities, this can lead to improvements in technology (the quality of capital) which would increase productive potential and thus LRAS. The government could also subsidise firms, as that would effectively reduce their costs of production, which would increase their profit margins and thus their retained profits. These retained profits could either be used for increased investment in capital goods and/or increased investment in R&D. This would increase both the quantity and quality of capital, increasing productive potential and thus LRAS.
Examples of market based policies
KEY POINTS TO INCLUDE: INCREASE QUANTITIY OF FACTORS OF PRODUCTION, INCREASED QUALITY OF FACTORS OF PRODUCTION, LOWERS COST OF PRODUCTION
Reduce income tax and reduce unemployment benefits-
A decrease in income tax and a reduction in unemployment benefits, may incentivise those who are economically inactive (outside of the labour force) to enter it. This would be because there is now the potential to earn higher levels of disposable income and also (for the voluntary unemployed) reduced incentive to stay unemployed as their disposable income will shrink (due to lower benefits). This could lead to an increase in LRAS due to a higher quantity of labour (larger labour force) and thus increased productive potential. Additionally, it is sometimes thought that lower income tax may incentivise people to work harder and work longer hours, due to the fact that they have the opportunity to earn more money than previously and because workers may feel more motivated. If this leads to an increase in productivity, this could also increase LRAS due to a higher quality of labour
REDUCING/REMOVING MINIMUM WAGE-
You could also make the case that removing a NMW could be considered a supply-side policy. Removing a NMW would reduce the costs of production of many firms, likely resulting in an increase in their profit margins and thus retained profits. Firms may then feel more willing and able to increase investment, and the higher profit margins may increase business confidence, further increasing firms’ willingness to invest. This could result in both AD and LRAS increasing (LRAS would increase due to a larger capital stock). Additionally, you could also say that the fall in classical unemployment (because the NMW is gone) would mean that rather than people receiving benefits, some people would now be receiving wages and thus likely higher disposable incomes (than the benefits they were on) after the NMW is removed. This could lead to an increase in consumption and thus AD
INCREASED PRIVATISATION-
Privatisation is the transfer of ownership of property or business (e.g. the NHS) from a government to the private sector. It is often thought that the government can be inefficient in its use of resources and so, as a result, productive potential will be lower than it should be due to wasteful use of resources. By transferring some of these resources to the private sector, it is thought that the productive potential of the economy may increase. This is because firms will likely use said resources more efficiently due to their profit incentive and their incentive to not be wasteful and let costs get out of control. They may also provide better quality products due to the fact that they will be specialised in the product that they are producing (unlike government officials), and so this can further increase the productive potential of the economy and thus LRAS
DEREGULATION-
Deregulation is likely to reduce the costs of production for firms (which should increase their profit margins), and it may also make them more optimistic about future economic conditions as they can potentially look forward to more deregulatory policies from the government rather than being fearful of more regulatory ones. The resulting effect would potentially be an increase in (net) investment which would increase both AD and LRAS. An additional effect, is that decreased regulations should reduce barriers to entry which may have been preventing new technology or more efficient producers from entering the market. As a result, this could have the effect of incentivising higher levels of entrepreneurship and improved technology, which could increase the productive potential of the economy and thus lead to LRAS increasing
Evaluation of SSPs
No guarantee of success- Almost all of these supply-side policies could largely be said to be based upon fairly wishful thinking. In reality, there is no guarantee that people will react or behave in the way that the government expects them to (e.g. low or high business and/or consumer confidence). The government’s policy itself may even be flawed (e.g. wasteful education reforms that do little to improve the quality of education)
Opportunity cost- Supply-side policies that involve subsidies or government spending are extremely expensive, often costing billions of pounds. This is money that could have been spent on other essential services such as health services or education. Possibly, the government actually funded this through cuts in spending on health or education, and so they would be creating new problems in those areas. Additionally, if the government spending or subsidy was paid for through borrowing, then the government will have to pay this back in the future by raising taxes (to increase tax revenue). Higher taxes (particularly corporation tax) could then end up reducing productive potential, and thus LRAS, due to its negative impact on investment
Time lags- Supply-side policies suffer from all the same types of lags as fiscal policy and monetary policy, although it suffers most greatly from the implementation and effectiveness lag. Supply-side policies that involve government spending require a very long time to even set up. For example, it may take up to a decade to build lots of new schools, and spending on infrastructure could potentially take multiple decades. Even in the case for spending on education) when it mostly consists of reforms to the education system, before the full effects of those reforms can be felt and then seen to increase the level of human capital, it could take decades (or even longer, depending on what level of education is getting reformed). Such large time lags reduce the effectiveness of supply-side policies
Depends on size of the change- If, for example, the size of a subsidy that the government gave to firms (in some industry) was very small, this will limit the impact it has on their costs of production, their profits, their level of investment (in capital or R&D), and thus the impact on LRAS. This would reduce the effectiveness of such a policy
