Supply-side Policies Flashcards
What are supply-side policies used for?
To increase the productive potential of the economy and shift the LRAS to the right.
What is a market based supply side policy?
Allows markets to work more freely with minimal government intervention.
What is an interventionist supply side policy?
Governments provide capital goods and services where it is believed the market has failed to provide them.
What do market based supply-side polices include?
Policies to Increase competition,
Labour market reforms,
Incentive related policies.
Why use policies to increase competition?
Greater competition means greater efficiency, leading to a larger output which can be produced with the same amount of resources. Could also lead to better quality, innovation and lower prices.
Market Based policies: Policies to increase competition - deregulation.
Reducing the number and severity of policies on a firm, reduces the costs of production for firms. Don’t have to spend time or money to comply with rules.
Market Based policies: Policies to increase competition - Anti-monopoly regulation
Prevents domestic monopolies for increased competition, thus more choice and lower prices for consumers.
Market Based policies: Policies to increase competition - trade liberalisation
Encourages specialisation, trade and increased no. of goods and services.
Market Based policies: Policies to increase competition - privatisation.
The sale of state owned industries to the private sector. They can be more efficient because they need to make a profit, so there will be less resources for the same output, so average costs of production falls.
Why use labour market reforms?
They are designed to make markets more responsive to supply and demand so level of employment will increase and productivity will rise.
Market Based policies: labour market reforms - reducing trade union power
Trade union: group of workers joining together to further their own interests with regards to pay and working conditions. Often result with wages above equilibrium and lower levels of productivity. Reducing their powers = higher levels of employment, higher productivity. Workers can be made redundant more easily so they can move between employers easily.
Market Based policies: labour market reforms - ending/reducing the national minimal wage.
It will enable firms to hire more workers and produce more output.
Market Based policies: labour market reforms - reducing unemployment benefits
If there is a cut of unemployment benefits or the duration for which they are available shortened to encourage people to accept jobs.
Market Based policies: incentive related policies - reducing income tax.
Incentive for workers to work longer/harder as they can keep a higher proportion of their income. Could increase productivity. However many individuals do not have the opportunity to alter their hours in response to a tax change due to contracts.
Market Based policies: incentive related policies - reducing corporate taxes
The firms will have more funds for investment. Can also now have more reserve and development.
Evaluation of market based policies:
Increased inequality: low income earners/the unemployed may find incomes falling relative to others in society. (Cutting income tax which is progressive)
Increased negative externalities: from reduced regulations
Decrease in tax revenue
What implications do interventionists supply-side polices have?
Spending by the government represents an addition to AD, as well as impacting productivity and total output which will increase AS.
Interventionist supply-side policy: investment in Human capital
Education: govs. providing a free/subsidised education with making regular changes to the curriculum. It will improve skills and productivity of the workforce increasing productivity.
Training: giving subsides to firms to training workers, helping retired workers to update their skills.
Health services: free or subsidised health care.
Interventionist supply-side polices: Investment in new technology
Encourage R and D by offering tax incentives e.g not paying corporation tax in profits used for R and D. Govs. can also sponsor R and D.
Interventionist supply-side polices: Investment in infrastructure
Building large scale public projects e.g highways, bridges, communication networks.
It will increase the countries output and it will become cheaper/easier to produce/transport finished products.
Interventionist supply-side polices: Industrial policies
Govs. have agencies supporting/encouraging the development of industry.
E.g financial incentives (subsidised loans, reduced corporation tax rates) and advice for small firms.
Infant industry: new firm that doesn’t produce enough to benefit from economies of scale. Thus has higher average costs of production compared to their competitors. Govs can use tariffs to protect this firm to give it time to compete on the world market.
Evaluation of Interventionist supply-side polices
Time lags: demand side effects may be felt quickly however the supply-side effect may take years to have an impact.
Budget constraints: limited by government budget and their ability borrow money. Also the opportunity cost of what the money could of been spent of.
Evaluation of supply-side policies as a whole
Keynesian perspective: increasing in AS won’t result in an increase in real output and economic growth.
