Supply-side policies Flashcards
What are supply side policies?
long-term government policies which seek to increase the productivity and efficiency of the economy
Main goal of supply side policy
Promote long term growth by increasing the productive capacity of the economy.
Main objective is to increase potential output, shown by a steeper long term growth trend in the business cycle diagram, or rightward shifts of the LRAS curve (Keynesian)
What are market based policies?
Market based policies emphasise the importance of well functioning competitive markets, and are usually favoured by monetarist/neo classical economists.
What are interventionist policies?
Interventionist policies rely on government intervention to achieve growth in potential output, and are usually favoured by economists influenced by Keynesian thinking.
Market based supply side policies : 1
Encouraging competition
How can privatisation increase efficiency?
Privatisation, can increase efficiency due to improved management and operation of the privatised firm. This is based on the argument that government enterprises
are often inefficient due to bureaucratic procedures, high administrative costs and unproductive workers.
How can deregulatipn improve efficiency?
Deregulation. Deregulation involves elimination or reduction of government regulation of private sector activities, based on the argument that government
regulation stifles competition and increases inefficiency.
How can trade liberasition improve efficiency?
Trade liberalisation. International trade between countries has become freer (liberalised) in recent decades due to reductions in trade barriers. Free or freer trade increases competition between firms both domestically and globally, which can result in greater efficiency in production and an improved allocation of resources.
Market based policies : 2
Labor market reforms
Abolishing minimum wage. Elimination or reduction of the legal minimum wage reduces unemployment by allowing the equilibrium wage to fall. The benefits would include lower unemployment; greater firm profits, as wage costs would be lowered; more investment and economic growth.
Reducing unemployment benefits. It is argued that unemployment benefits have the unintended effect of reducing the incentive to search for a new job, causing some unemployed workers to remain unemployed for longer periods than necessary.
Market based policies: 3
Incentive related policies.
Lowering business and personal taxes. Lower taxes on business profits (corporation taxes) can work to increase aggregate demand by increasing investment spending. Supply-side economists argue that cutting taxes on
firms’ profits is a supply-side measure because increases in the level of after tax profits mean that firms have greater financial resources for investment and for pursuing technological innovations through more R&D. resulting in greater potential output.
Interventionist supply side policy : 1
Investment in human capital: education and health services
Training and education.
More and better training and education lead to an improvement in the quality of labour resources, increasing the productivity of labour, which is one of the key causes of economic growth
Improved health care.
When workers have access to good quality health care services, they become healthier and more productive.
Interventionist supply side policy : 2
Investment in new technology: research and development
Governments in many countries around the world are heavily involved in R&D. In addition, governments often provide incentives to private sector firms to engage in R&D activities; these usually take the form of tax
incentives, as well as the granting of patents for the protection of inventions.
Interventionist supply side policy : 3
Investment in infrastructure.
Infrastructure is a type of physical capital, and therefore results from investment; it includes power, telecommunications, roads, dams, urban transport, ports airports, irrigation systems, etc.
More and better infrastructure increases efficiencies in production as it lowers costs.
Good roads, railway and other transport systems, for example, save time and effort spent in transporting goods and services, allowing more output to be transported and costs to be lowered.
The availability of effective telecommunications permits faster and easier communications, enabling economic activities to be carried out more efficiently. More and better infrastructure improves labour productivity.
Limitations of supply side policies 1/4
Time lags
Supply-side policy can take a long time to work their way through the economy. For example, improving the quality of human capital, through education and training, is unlikely to yield quick results.
The benefits of deregulation can only be seen after new firms have entered the market, and this may also take a long time.
Limitations of supply side policies 2/4
Costs are significant
Supply-side policy is very costly to implement.
For example, the provision of education and training is highly labour intensive and extremely costly, certainly in comparison with changes in interest rates.
