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)
Decrease in welfare
- Reducing welfare benefits can incentivize individuals to enter the workforce rather than relying on government support.
- This increases labor supply, potentially lowering wage costs and improving flexibility in the labor market.
- However, it may increase inequality and reduce the standard of living for vulnerable groups, especially if jobs are scarce or poorly paid.
Reducing Minimum Wage
- Lowering or removing minimum wage laws allows businesses to hire workers at lower costs, which can boost employment opportunities, especially for low-skilled workers.
- This enhances price competitiveness and encourages businesses to expand production.
- Conversely, it risks increasing in-work poverty and reducing consumer spending due to lower incomes.
Reducing Trade Union Power
- Weakening trade unions limits their ability to negotiate for higher wages or restrict working hours, enabling firms to adapt labor use flexibly to changing economic conditions.
- This reduces labor costs, improving competitiveness and potentially boosting employment.
- However, it could lead to exploitative practices, reduced worker morale, and greater income inequality, undermining long-term productivity.
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
- Deregulation can concentrate power and wealth in the hands of large firms or wealthy individuals. Workers might face reduced wages, job insecurity, and fewer protections in a less regulated labor market.
This exacerbates social inequality and can lead to reduced social cohesion.
examples of how SSps have helped UK economy, market based
One of the most successful privatization examples is the telecommunications industry. In the 1980s, many countries around the world began to privatize their telecommunications industries. The United Kingdom was one of the first countries to do so, and it was a huge success. The privatization of British Telecom (BT) led to an increase in competition, which resulted in lower prices and improved services. The government also received a significant amount of revenue from the sale of BT shares.
- Another successful privatization example is the airport industry. Many countries have privatized their airports, and the results have been impressive. The privatization of airports has led to increased efficiency, better services, and improved financial performance. For example, the privatization of London Gatwick Airport in 2009 resulted in a significant increase in passenger numbers and revenue.
disadvantages of privatisation
Loss of Public Interest Focus
- Private firms prioritize profit over public welfare. Essential services like healthcare, education, or utilities may become inaccessible to low-income individuals if prices are raised to maximize profits.
- This reduces equity and can exacerbate social inequalities.
Natural Monopolies
- Industries like water supply or railways are often natural monopolies, where competition is inefficient.
- Privatisation of such sectors may lead to private monopolies exploiting their position with high prices and reduced service quality.
- This harms allocative efficiency and reduces consumer welfare.
Short-Term Profit Focus
- Privatised firms might focus on short-term profits rather than long-term investments, such as infrastructure development or technological advancements.
- This undermines dynamic efficiency and could lead to deterioration in service quality over time.
Job Losses
- Private firms often streamline operations to cut costs, which can lead to significant layoffs. Reducing labor costs might harm worker morale and increase unemployment.
- This has social and economic consequences, including increased welfare dependency and reduced aggregate demand.
Loss of Government Revenue
- Privatising profitable state-owned enterprises means the government loses a steady income stream from dividends. This may result in higher taxes or reduced public spending elsewhere.
In the long run, this could limit fiscal flexibility and harm economic stability.
Wealth Inequality
- The sale of public assets often benefits wealthy investors or corporations, especially when shares are underpriced during privatisation.
- This concentrates wealth further and reduces opportunities for ordinary citizens to benefit from public resources.
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
Higher Labor Productivity
Education and training improve workers’ skills and knowledge, enhancing their productivity.
Skilled workers can produce more output in the same amount of time, increasing efficiency and reducing unit labor costs.
Impact: LRAS) shifts outward, enabling higher potential output and sustainable economic growth.
Improved Workforce Flexibility
Training programs can help workers adapt to changing industries and technologies.
By reskilling and upskilling, the workforce becomes more versatile, reducing structural unemployment and better aligning labor supply with demand.
An adaptable workforce increases the economy’s capacity to respond to shocks, enhancing LRAS.
Reduced Income Inequality
Access to education and training can help reduce wage disparities.
With better skills, low-income workers can access higher-paying jobs, improving overall living standards and labor market participation.
A more inclusive labor market increases economic capacity, further contributing to LRAS growth.
