supply side policies Flashcards
Market based vs interventionsit policies
Market:
-allow free market to eliminate imbalances
-limit gov intervention
-forces of supply and demand
Interventionist:
-Rely on govenment intervention
What are supply side policies
-Aims to improve long-run productive capacity and efficiency of an economy
Create incentives - reduce income tax
Market:
-Reduce income and coorporation tax to encourage spending or investment - more disposable income
-Wage rate decrease
-Loss of gov revenue - could be spent elsewhere in economy
-Unemployment - not enough job availaility
-Depends on size of tax cut
-Cutting top tax rate affects few wealthy people - already in work - cutting lower ones will incentivise inactive people to get a job
Promote competition
Market:
-deregulating or privatising the public sector - firms can compete in a competitive market - improve economic efficiency
Int:
-Strict gov competition policy to reduce monopoly power and ensure smaller firms can compete too
Reform labour market
Int:
-Gov can increase geographical immobility of labour by subsidising reallocation of workers - improve availability of job vacancy information
-reduce frictional unemployment
Eval:
-Frictional unemployment is relatively small and insignificant
Improve skills and quality of labour force
Int:
-Increased opportunities and incentives for workers
-Increase in quality and productivity of workforce
-increase occupational mobility
-Subsidise training - lower cost for firms
-More spending on education - more skilled and efficient workers
-Increased spending on healthcare - improved quality of labour - more productive
-All leading to reduced occupational immobility of labour
-Time lags of education/ e.g. building a university
-Opp cost of gov spending - e.g. healthcare, reducing taxes
-SR supply of labour will fall - LR more skilled workers
-The subject field is important
Improve infrastructure
Int:
-Improve roads/schools
Strengths of SSP
-Only policies that can deal with structural unemployment - labour market can be directly improved with education and training
-Enhanced sustainable economic growth - increased productive capacity
-Reduced cost-push inflation - greater efficiency and productivity reduce COP
-Increase tax revenues in LR due to higher economic growth and lower spending on welfare benefits
-Industries becoming more competitive through lower costs and increased productivity reduces trade balance
Weaknesses of SSP
-Time lags - infrastructure projects, education improvements, R+D take years to yield results - not all policies will be successul - not a SR solution
-Increased inequality - tax cuts and deregulation can lead to a more unequal distribution of wealth - disproportionally benefit the wealthy
-Gov budgest worsens - high expenditure/ lower taxes - however there is a LR benefit
-Does not affect demand pull inflation
-If there is a lot of spare capacity in an economy there will be no effect - elastic part of keynsian
-Effectively running expansionary fiscal policy - conflict with fiscal position
-Depends where AD is in economy
RWE SSP
-Privatisation of Royal Mail in 2016
-Deregulation of UK retail energy market
-Tax free childcare - up to £2,000 a year
Create incentives - reduce corporation tax
-Increase retained profits for firms
-increase investment
-capital stock increases
-increase in quality and quantity of capital
Eval
-Firms may save rather than invest
-machines may replace human labour - structural unemployment - not at full capacity
-Depends on size of tax - enough to be compared to costs of capital
-Loss of gov rev
-Time lag between initial cut, investment, increase in productive capacity
create incentives/reform labour market:
reducing benefits, NMW
-increase opportunity cost of being out of work
-increase in supply of labour
-workers willing to accept lower wages
-fall in COP - firms may hire more workers
-Reduce NMW - free market forces allocates wages - labour market should clear
-Reduce trade union power - employing workers is less restrictive - labour mobility increased - more efficient LM
Eval:
-Fall in AD due to reduced consumption and gov spending
-May not be enough jobs
-may lack necessary skillset
-Increased levels of inequality - larger gap between poor and rich
