18 Supply Side Policies

What are supply side policies

designed to increase LR AS in economy

Main goals suply side

1. long term growth, productive capacity of economy

2. imporve comp and efficiency

3. reduce labour costs and unemployment through increase labour market flex

4. reduce inflation, improve interntaional comp

5. increase firm incentives to invest in innovation by reducing costs

Market based policies - what are they, and what types

allow market to operate freely, minimal gov intervention

create incentives for labour to work harder and more productively, and increase incentive for firm to invest

• reduction in household income tax

• reduction in corporate taxes

  • more money to invest, addition of capital stock, increase FOP

  • R&D

• Labour market reforms

  • reduction in trade union power: reducing trade union power, reduce unions wanting increased cost of labour, thus lower COP

  • reduce min. wage

  • reduce unemployment benefits

• deregulation: many regulation increase COP

• privatisation: Sale of gov.-owned firms to priv sector

• Policies increase comp: comp increase efficiency

• trade liberization:

  • increase comp internationally

  • eliminate subsidies, tariffs, quotas

  • exporting firms more efficient than foreing

Limitation of market based

1. reduction in household income tax may not lead to incentive to work

2. reduction in household income tax benefit high wage more than: income inequality

3. Reducing coorporate taxes, increase net profits, benefit wealthy - income inequality

4. labour market reforms may lead to reduction in living standard - income inequality

5. Deregulation-negative effects

   • Negative for environment. Externality

   • reduce worker safety

   • worse working conditions

6. Privatisation not transparent. Sold below value

7. time lags

Interventionist supply side policies

• invest in human capital

  • education and training, positive externalities

    • gov responsibility to ensure countries education/training facilities in shape

  • also improve investment in quality & quantity of health care

• research and development

  • encourage R&D by firms by tax incentives

  • gov. can encourage R&D by providing patents and copyrights

• provision and maintenance of infrastructure

  • infrastructure - large scale capital

    • gov contributions

    • LRAS enhanced by improved infrastructure

• direct support for business/industrial policies

  • policies that support & encourage development of industry

    • financial subsidies

Limitations of supply side policies

1. in all interventionist, monetary costs. Always an opportunity cost when gov spend money - increases expenditure on one, inadequate on other . Secondly, increased expenditure funded through borrowing, increase debt

2. Time lags

3. Extent of dif. interventionist policies depend on aim of government

4. controversies arise concerning provision and funding of education

   e.g. provision of resources for science vs art

decreased income tax and corporate tax on fiscal

• have expansionary fiscal. In short run AD increases

• interventionist, g spending increase, ad increase, expansionary fiscal effects