Supply-side Policies Flashcards
What do supply-side policies do
Aim to improve the long run productive potential of the economy
The distinction between market-based and interventionist policies
-Market-based policies limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used.
-Interventionist policies rely on the government intervening in the market.
Market-based policies
To increase incentives
-Reducing income and corporation tax to encourage spending and investment.
-Reducing benefits to increase the opportunity cost of being out of work
To promote competition
-By deregulating or privatising the public sector, firms can compete in a competitive market, which should also help improve economic efficiency.
To reform the labour market
-Reducing the NMW (or abolishing it altogether) will allow free market forces to allocate wages and the labour market should clears.
-Reducing trade union power makes employing workers less restrictive and it increases the mobility of labour. This makes the labour market more efficient.
Interventionist policies
To promote competition
-A stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete too.
To reform the labour market
-Governments could try and improve the geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information.
To improve skills and quality of the labour force
-The government could subsidise training. This also lowers costs for firms, since they will have to train fewer workers.
-They may spend more on education, such as university, so workers will be more skilled and efficient.
-Spending more on healthcare helps improve the quality of labour force, and contributes towards higher productivity.
-This may help to reduce occupational immobility.
To improve infrastructure
-governments could spend more on infrastructure, such as improving roads and schools.
AD/AS diagrams
Both diagrams show the effects of employing a supply-side policy. The LRAS curve shifts to the right, to show the increase in the productive potential of the economy. In other words, the maximum output of the economy at full employment has increased. This leads to a fall in the average price level P1 to P2, and an increase in national output, from Y1 to Y2.
Can use Keynesian or classical LRAS curve.
Strengths and weaknesses of supply-side policies
-Supply-side policies are the only policies which can deal with structural unemployment, because the labour market can be directly improved with education and training.
-demand-side policies are better at dealing with cyclical unemployment, since they can reduce the size of a negative output gap and shift the AD curve to the right.
-There are significant time lags associated with supply-side policies and not all policies will be successful.
-Market-based supply-side policies, such as reducing the rate of tax, could lead to a more unequal distribution of wealth.
-There may be negative impacts on the government budget due to higher government expenditure or lower taxes.
-Policies may impact AD before they impact AS and so they could have inflationary effects.
-If there is a lot of spare capacity in the economy, then supply side policies will have no impact. On the Keynesian curve, if the economy is producing on the elastic part of the curve, there will be no change in output following the policy.
