Supply side policies Flashcards
what are supply side policies
policies designed to increase the productive capacity of the economy, shifting LRAS to the right
- if successful, then all 4 main macroeconomic objectives will improve
what are the two types of supply side policies
- interventionist supply side policies
- market based supply side policies
what do interventionist supply side policies do
they correct market failure and promote more government intervention in the economy
what do market based supply side policies do
they try to shift LRAS right wards by reducingbarriers for the private sector
3 generic reasons why the LRAS curve would shift to the right
- increase in the quantity of the factors of production
- increase in the quality of the factors of production
- improvement in the productive efficiency of the economy (reduction in long run costs of production)
examples of interventionist SSP
- govt spending on education/training - this boosts the skills of the workforce, improving productivity of labour, improving the quality of labour
- govt spending on infrastructure - new transport being built/existing being upgraded, long run costs for businesses will fall, as it’ll be cheaper and easier to access raw materials and sell goods and services
- buildings - eg new schools etc, will increase the quantity of the capital stock in the economy, increasing quantity of capital, shifting LRAS right
- subsidies - promotes investment, firms can then spend on R&D, new capital, technology etc, can increase quantity and quality of the factors of production
examples of market based SSPs (tax reform)
tax reform :
- lower income tax - for those who are inactive, higher incentive for them to get into work, increasing quantity of labour, those in work have an incentive to work harder, as more of the income earned would be kept, increasing quality of labour
- lower corporation tax, more retained profit to use for investment, increase quality and quantity of capital
examples of market based SSPs(labour market reform)
- reducing welfare benefits - strong incentive for the economically inactive to join the labour force, increasing quantity of labour
- reduction in min wage and reducing trade union power - both of these will increase cost of production for firms, reducing long run costs of production
examples of market based SSPs(competition policy)
- privatisation - Privatized firms often operate more efficiently than their state-owned counterparts due to profit-driven decision-making, leading to cost reductions, streamlined operations, and improved productivity. Privatization encourages innovation as firms seek to differentiate themselves and gain competitive advantages in the market.
- Privatization can attract private investment in infrastructure projects and industries previously monopolized by the state. Private investors may inject capital, technology, and expertise to upgrade infrastructure and expand capacity.
- deregulation - Deregulation promotes competition by removing entry barriers, price controls, and restrictions on market entry and exit.
- Increased competition incentivizes firms to innovate, invest in productivity-enhancing technologies, and adopt best practices to gain market share. Deregulation fosters a dynamic business environment where firms compete based on efficiency, quality, and innovation, driving productivity improvements across industries.
- trade liberalisation
: Increased access to global markets expands export opportunities for domestic firms, allowing them to reach larger customer bases and access foreign inputs and technologies. Export-oriented firms tend to be more productive, innovative, and competitive, driving productivity growth in the economy.
evaluation points for SSPs
- there is no guarantee that the policies will work, so the policies may fail
- a lot of the policies are expensive, risk of wasteful spending
- time lags, eg govt spending on infrastructure could take decades before an infrastructure project is completed
- negative stakeholder impacts - labour market reforms seem very harsh, for those on lower incomes, the reforms could have a very severe impact, also for deregulation, what laws could be taken away or relaxed?
- output gaps - SSPs promoting growth depends on the size of the output gap, what stage of the cycle the economy is in, SSPs would be useless during a recession
- need for targeted SSPS - they need to be used to target issues in the economy
disadvantages of deregulation
- Deregulation can lead to market failures, especially in industries with natural monopolies or significant externalities. Without proper oversight, companies may exploit their market power, resulting in price gouging or reduced quality of service.
- Deregulation can exacerbate negative externalities, such as pollution or unsafe working conditions, relaxing environmental regulations in the energy sector may lead to increased emissions and environmental degradation.
Deregulating the financial sector may lead to excessive risk-taking and speculative behaviour, as seen in the lead-up to the 2008 financial crisis
examples of how SSps have helped UK economy, market based
The privatization of state-owned enterprises (SOEs) in the UK, such as British Telecom and British Airways, led to increased efficiency and profitability. These companies became more responsive to market demands, streamlined operations, and adopted innovative practices to remain competitive.
- increased efficiency and competitiveness can stimulate job creation in the long run. For example, after privatizing British Rail, new opportunities emerged in the rail industry, including investment in infrastructure and expansion of services, ultimately leading to employment growth.
- : Deregulating certain sectors, such as energy or transportation, can result in lower prices for essential services, benefiting low-income households. For instance, deregulation in the energy sector may lead to more competitive pricing and lower utility bills for consumers.
disadvantages of privatisation
- can increase income inequality as it often benefits wealthy more, privatised companies are often used by richer people. can widen the wealth gap as profits go to wealthier groups rather than being shared through public services
- Privatization can sometimes lead to the emergence of monopolies, especially in industries with high barriers to entry. This can result in reduced competition, higher prices for consumers, and lower quality products or services.
- private companies may prioritise profits over the public, may lead to poorer service quality in areas like healthcare, education and transportation
- private companies often focus on making quick profits, may lead to the neglect of long term investment, this can hurt the development and maintenance of important infrastructure and services
how can an increase in infrastructure help lras
- Infrastructure projects typically require a significant amount of labor, ranging from construction workers to engineers, thereby creating employment opportunities.
- Improved infrastructure can reduce transportation costs, enhance logistics efficiency, and increase access to markets, leading to productivity gains for businesses.
how can an increase in education and training programs help lras
- Education and training programs equip individuals with the skills and knowledge needed to succeed in the labor market, thereby increasing their employability and earning potential.
- Access to quality education and training opportunities can help reduce income inequality by providing individuals from disadvantaged backgrounds with the means to improve their economic prospects.
