2.6.3+2.6.4: Supply side policies and Conflicts and trade-offs between objectives and policies

Market based policies

• They limit the intervention and allow the free market to eliminate imbalances

• Aim to increase incentives:

  • Reduce income and corporation tax to encourage spending and investment

  • Reducing benefits to disincentivise unemployment

• Aim to promote competition:

  • By deregulating or privatising the public sector, firms can compete in a competitive market which should help improve efficiency

• Aim to reform the labour market:

  • Reducing the national minimum wage will allow free market forces to allocate wages and labour market should clear

  • Reducing trade union power makes employing workers less restrictive and increase labour mobility- makes labour more efficient

Interventionist policies

• Rely on the government intervening in the market

• Aim to promote competition:

  • A stricter government competition policy could reduce monopoly power and ensure smaller firms can compete

• Aim to reform the labour:

  • Governments could try improve the geographical mobility of labour by subsidising worker relocation or improve the availability of job vacancy info

• Aim to improve skills and quality of the labour force:

  • Could subsidies training- lowers costs for firms, increase education spending- more skilled workers, increase healthcare spending- improves labour quality and contributes to higher productivity

• Aim to improve infrastructure:

  • Could improve roads and schools

Strengths and weaknesses of supply side policies

• They are the only policies which deal with structural unemployment since the labour market can directly be improved with education and training

• Demand side polices are better at dealing with cyclical unemployment because they can educe the size of a negative output gap and shift the AD curve right

• Supply side policies have significant time lags and will not all be successful

• Market based polices would result in a more unequal wealth distribution

• There may be negative impacts on the budget due to higher expenditure and less tax revenue

• Policies may impact AD before AS and could have inflationary effects

• If there is a lot of spare capacity, supply side policies will have no impact

Economic growth vs inflation

• A growing economy is likely to experience inflationary pressure

• Especially when there is a positive output gap and AD increases faster than AS

Economic growth vs the current account

• During periods of growth, consumers have high levels of spending- UK consumers have a high marginal propensity to import- worsens the current account deficit

• However, export led growth like China means a country can run a current account surplus and have high levels of growth

Economic growth vs the budget deficit

• Reducing a deficit requires less expenditure and more tax revenue

• This would cause a fall in AD And would result in less growth

Economic growth vs the environment

• High rates of growth result in high levels of negative externalities

• Increased output means increased pollutions and greater usage of non renewable resources

Unemployment vs inflation

• There is a short run trade-off between unemployment level and the inflation rate

• This is demonstrated by the Phillips curve

• As growth increases unemployment falls due to more jobs being created→ this causes wages to increase→ increased disposable income→ increased consumer spending and an increase in the average price level

• The extent of this trade-off can be limited if supply side policies are used to reduce structural unemployment which will not increase average wages

Potential policy conflicts and trade-offs

• Occurs when one policy has a larger impact than another, which conflicts with the other policy pr reduces its effectiveness

• Every policy is likely to have intended consequences

Environment vs competitiveness

• If ’green taxes’ are implemented e.g. carbon taxes, or if there are minimum prices on pollution permits, the competitiveness of domestic firms could be compromised

• This is due to being limited in their production

Fiscal vs monetary policy

• Expansionary fiscal policies involve more government borrowing which could cause interest rates and the inflation rate to rise

Interest rates vs inequality

• The low interest rates could affect the distribution of income since savers only receive a small return on savings