Supply Side Policies

Question 1

Supply side policy aims

Answer 1

What are supply side policies aims:
• To increase the Quantity of Factors of Production
• To increase the Quality of Factors of Production
• To increase the Productive Efficiency (decrease the long run costs of production)

Question 2

Interventionist policies

Answer 2

Interventionist Policies:
Government spending on Education/Training
• Government spending on Infrastructure
• Subsidies to firms to promote investment

Question 3

Market based policies

Answer 3

Market Based Policies (non interventionist):
• Tax reform - lower income and corporation tax (increase consumption and investment)
Labour market reform - reduce benefits (increase incentive for economically inactive to join the labour force). Reduce minimum wage, reduce trade union power (decrease long run costs of production, therefore increase productive efficiency)
• Competition Policy - privatisation, deregulation, trade liberalisation - aim to increase competition, forcing firms to decrease long run costs of production

Question 4

Cons

Answer 4

Cons of supply side policies:
• No guarantee of success
Costly (especially interventionist and market based tax reforms)
•Time lags - takes time to feel the effects .
Negative stakeholder impacts - mainly on market based - deregulation may come with decreased safety - labour market reforms also negatively impact stakeholders in the economy
Output gap - increasing LRAS depends on the size of the output gap (if its large may do nothing as AD can’t keep up) - further if economy is in recession supply side policies will be useless for the short term
• Supply side policies need to target issues that exist.