types of supply side policies Flashcards
what do free market based supply side policies aim to do ?
Free market based supply-side policies aim to free up markets and improve market incentives so as to increase the long-run aggregate supply
Explanation of Free Market Supply-side Policies - to increase incentives
Reducing income/corporation tax rates incentivises workers to work harder (they keep more money for themselves) and provides firms with extra funds which they can use to invest in new machinery/technology
Reducing capital gains tax
possible effects -
Taxes decrease → firms and individuals retain more money for themselves → incentives increase → productivity improves → long term growth increases
Explanation of Free Market Supply-side Policies - To improve competition and efficiency
Deregulation. Any regulation increases costs of production for firms and deregulation decreases costs which may result in greater supply
Privatisation. Government firms are usually so big that private enterprise refrains from trying to compete with them. Privatisation encourages new firms to enter the market and compete, thus increasing the aggregate supply in the economy
Anti-monopoly regulation helps to increase competition in an economy which leads to a more efficient allocation of resources
possible effects -
Regulation on firms decreases → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
State owned firms are privatised → more firms enter the market to compete → competition and efficiency improves
Explanation of Free Market Supply-side Policies - to reduce labour costs and create labour market flexibility
Decreasing trade union power so wages can be decreased
Decreasing or abolishing minimum wages to lower costs of production
Restructuring the unemployment benefits system to incentivise the unemployed to seek work
Possible effects -
Wages decrease → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
draw abolition of minimum wage
diagram analysis
Diagram analysis
The demand for labour (DL) represents the demand for workers by firms
The supply of labour (SL) represents the supply of labour by workers
The national minimum wage and quantity for truck drivers in the UK is seen at W1Qd
The UK government removes the national minimum wage (NMW) at W1
Incentivized by lower wages, the demand for labour by firms increases from Qd → Qe
Facing lower wages, the supply of labour by workers decreases from Qd → Qe
The labour market is now in equilibrium at WeQe
There is a lower wage rate and higher quantity of workers employed
advantages of free market supply side policies
-Improved resource allocation: increasing the productive capacity of an economy requires more efficient use of its resources, including labour
-No burden on government budget: with an emphasis on freeing up markets and allowing market forces to drive efficiency and resource allocation, there is no requirement for government spending
disadvantages of free market supply side policies
Equity issues: E.g. the distribution of income worsens as labour market reforms and wage policies lower worker’s wages
Time lags: there are significant time lags between expenditure and seeing the benefits
Vested interests: can result in less effective outcomes, e.g. there are many examples of privatisation occurring in such a way that the government’s preferred bidders obtained an asset at a knock down price
Environmental impact: large infrastructure projects almost always have some negative externalities associated with their creation e.g. dam in a gorge to create a hydro electric dam damages the natural environment and eco system
what odes interventionist supply side policies require
Interventionist supply-side policies require government intervention in order to increase the full employment level of output
Explanation of Interventionist Supply-side Policies - education and training
Increasing government spending on education and retraining raises the quality of the workforce resulting in productivity improvements
possible effects -
Skill level increases → productivity improve → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
Explanation of Interventionist Supply-side Policies- Improving quality, quantity and access to health care
Increasing government spending on healthcare so that productivity improves
possible effects -
Human capital improves → productivity improves → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
Explanation of Interventionist Supply-side Policies- Research and development
Increased government spending on innovation increases the supply of potential jobs in the economy
possible effects -
A new industry emerges → new infrastructure is developed → more jobs are created → r.GDP increases → increase in long term economic growth
Explanation of Interventionist Supply-side Policies- provision of infrastructure
Increased government spending on infrastructure helps to facilitate the movement of people and goods which increases the aggregate supply
possible effects -
New infrastructure is developed → costs of production decrease → supply increases → firms lower selling prices → international competitiveness improves
Explanation of Interventionist Supply-side Policies- Industrial policies
Industrial policies are direct and targeted support to firms or industries in the form of subsidie
possible effects -
Industries receive subsidies → costs of production decrease → supply increases → firms lower selling prices → international competitiveness improves
advantages of Interventionist Supply-side Policies(explained)
Direct support of sectors important for growth: Subsidies to specific industries increase the rate of growth of an economy
Direct support reduces unemployment
Direct support can increase the level of exports
Improvements in living standards: Improvements in Infrastructure can raise the quality of life for all citizens
disadvantages of interventionist supply side policies (explained)
Costs: they are expensive to implement and are paid for using tax revenue - or increased government borrowing
Time lags: due to their long-term nature, changes in government often result in changes to budgets and scope of projects and the end result may be less effective than it could have been
The cancellation of the High Speed Rail project in the UK is an example of this
