Supply-Side Policies Flashcards
What are Supply-Side policies?
Supply side policies are policies designed to increase the productive capacity of the economy, shifting LRAS to the right. They improve upon all 4 macroeconomic objectives.
What are some examples of interventionist supply-side policies?
- Government spending on education/training
- Government spending on infrastructure
Why does the LRAS curve shift?
- Quantity of factors of production
- Quality of factors of production
- Productive effiency increases (decrease in LRAC)
Standard An - Government spending on education and training to boost LRAS
(AD/AS diagram) - need to adapt the links based on the question but this is a general outline
* The government may decide to spend money on education and training. For example, build more schools/educate more teachers… + adult training. In 2017, the UK government introduced the apprenticeship levy requiring all UK employers with a pay bill of over £3 million each year to invest in apprentiships.
* As a result, workers will gain new skills and qualifications, which in turn increases productivity, meaning that workers can now produce more in a given period of time.
* This increases the quality of labour in the economy (ceteris paribus), which boosts productive capacity.
* As a result, LRAS shifts rightwards from LRAS1-LRAS2, which boosts real national output and incomes (Y1-Y2)
* ATQ…reducing poverty and inequality/increasing living standards/improving the current account position/reducing stuctural unemployment due to the occuptional immobility of labour.
Standard An - Government spending on infrastucture to boost LRAS
- The government may decide to spend money on infrastucture projects, such as transport infrastucture. For example, the UK government’s construction of the HS2 railway.
- As a result, long-run average costs for business’ can fall as it is now easier and cheaper to access raw materials and also sell/transport goods and services. Consequently, productive effiency in the economy rises, thus boosting productive capacity.
- Furthermore, the government may decide to build other infrastucture such as schools and hospitals. This means that the quantity of capital stock in the economy will rise.
- As a result, LRAS will be boosted, from LRAS1-LRAS2.
- ATQ…..
- You can evaluate this by talking about market failure - negative externalites of production - there may be a net welfare loss to society is the social costs of this infastucture is less than the social benefits.
What are some examples of Market Based Supply Side Policies?
- Tax Reform - e.g lower incomes taxes and lower corporation tax
- Labour Market Reform - e.g Reduce benefits
- Competiton Policy - e.g Privatisation and Degregulation
Evaluation for Government spending on education and training
- However, there may be a large opportunity cost for providing a greater degree of education and training.
- In the UK, there is already a shortage of teachers, meaning that the government either has to train new teachers or provide greater incentives for those already teaching to leave their current teaching job to provide greater education and training.
- For example, the UK government may decide to provide greater financial incentives to teach people new skills causing sixth form teachers to leave sixth form colleges to teach said people.
- This poses an opportunity cost as by sixth form teachers leaving sixth form colleges to teach in the government scheme those in Sixth form colleges may now lack adequate education.
This can then cause further problems such as those who are in Sixth form now lacking the relevant skills and education possibly resulting in future structural unemployment due to the occupational immobility of labour. - Furthermore, there is also the issue of what to teach and whether or not that is currently valued in the labour market, and even if what is taught currently is valuable due to the time lag their skills may become void in the future labour market.
- Therefore, education and training may not….. (ATQ)
Standard An - Decreasing income tax (Tax Reform)
(insert AD/AS diagram)
* The government may decide to reduce income taxes. For example, the UK government decide to cut the basic rate of tax from 20% to 15%.
* As a result, this can increase the incentive for those who are economically inactive to seek work. This is because of the substitution effect of labour wherby the opportunity cost of lesiure has risen relative to working.
* Consequently, the quantity of labour in the economy will rise, boosting productive capacity in the economy.
* In addition, those who are already in work, may now be more motivated as they can keep more of the money they earn (efficiency wage theory) hence productivity in the economy may rise.
* This increases the quality of labour in the economy thus boosting productive capacity.
* Consequently, due to a rise in quantity and quality of labour in the economy, LRAS shifts rightwards, from LRAS1-LRAS2, boosing real national output and incomes (y1-y2)
* ATQ
Standard An - Decreasing Corporation Tax (Tax Reform)
- The government may decide to reduce corporation tax. For example, the UK government can reduce the main rate of corporation tax from 25% to 20%.
- As a result, firms now have more profit after tax (ceteris paribus). For instance, at 25% corporation tax a firm that makes £500,000 in profit pays £125,000 in tax wheras at 20% they only pay £100,000.
- Consequently, they may reinvest this profit for investment purposes such as increased machinary for production, which increases the quantity of capital stock in the economy, thus boosting productive capacity.
(there are also other reasons it can increase the quality of capital/labour + reduce LRAC)
……
Standard An - Reducing Benefits (Labour Market Reform)
(insert AD/AS diagram)
* If the government reduces benefits. For example, reducing welfare benefits.
* As a result, there is a strong incentive for those who are economically inactive to find work.
* Consequently, ceteris paribus, the quantity of works in the economy will increase.
* This will increase the productive capacity of the economy, shifting LRAS rightwards, from LRAS1-LRAS2.
* Real national output and incomes will rise from Y1-Y2….ATQ
Standard An - Competiton policy
- The whole idea of this is that by promoting competition policy, there is increased competition, firms that complete need to lower LRAC to compete, which increases productive efficiency, which then boosts LRAS.
- You could also try to talk about increased capital stock/improvements in capital.
(however, when referring to supply-side policies I would avoid using competition policy and stick to labour market reforms and interventionist SSP)
Evaluation for Tax Reforms
- However, perhaps tax reforms are not desirable as they may cause the crowding out effect.
- If the government reduces taxes, then, ceteris paribus, the government is going to have less revenue that can be spend.
- As a result, the amount of debt-fuelled government spending may rise.
- In the market for loanable funds, there is an increase in demand for loanable funds (in order to finance government spending), thus shifting demand in the market for loanable funds from D1-D2.
- Consequently, the private sector may be “crowded out” as with increased demand for loanable funds, market interest rates rise, from i1-i2 which discourages investment from the private sectors.
- This can harm future LR economic growth due to a lack of investment from firms….
