Supply side Policies

Supply side Policy

Supply-side policies aim to shift the long-run aggregate supply (LRAS)

Interventionist Supply side policies

they require government intervention in order to increase the full employment level of output, which are mainly used to correct market failure.

Marked-based supply-side policies

They aim to remove obstructions in the free market that are holding back improvements to the long-run potential.

The goals of supply-side policy

Long term growth, improving competition, increasing labour market flexibility, increase international competitiveness, increasing incentives.

Effect on growth

potential output increases leading to higher real GDP

effect on inflation

greater supply in the economy results in reductions in the prices of goods/services leading to disinflation and making the exports of the nation more competitive

effect on unemployment

this should fall as lower wage bills allow firms to recruit more workers

effect on Net external demand

due to increased supply, the prices of goods/services often decrease which makes them relatively more attractive to foreigners - so exports increase

effect on redistribution of income

This often worsens with the use of supply side policies as wages fall and government tax revenue has fallen too.

(Mkt) To increase incentives

Reducing income/corporation tax rates as they keep more money for themselves and so the workers are incentivised to work harder, productivity increases and so long term growth increases.

(Mkt) To improve competition and efficiency Deregulation

Any regulation increases costs of production for firms and deregulation decreases costs, which may result in greater supply, firms lower selling prices, and international competitiveness improves.

(Mkt) To improve competition and efficiency Privatisation

Government firms are usually so big that private enterprise refrains from trying to compete with them. Privatisation encourages new firms to enter and compete, competition and efficiency improves, and the aggregate supply increases.

(Mkt) To improve competition and efficiency Anti Monopoly

Anti-monopoly regulation helps to increase competition in an economy which leads to a more efficient allocation of resources.

(Mkt) To reduce labour costs and create labour market flexibility

Decreasing trade union power, decreasing or abolishing minimum wages cause wages to decrease, so the cost of production for firms falls, firms lower selling prices and international competitiveness improves.

(Itvnt) Education and training

Increasing government spending on education and retraining raises the quality of the workforce resulting in productivity improvements. This means that the cost of production for firms falls, firms lower selling prices and so international competitiveness improves

(Itvnt) Improving quality, quantity and access to healthcare.

Increasing government spending on healthcare so that human capital improves, productivity improves, the cost of production for firms falls, firms lower selling prices, international competitiveness improves.

(Itvnt) Research and development

Increased government spending on innovation and so a new industry emerges, new infrastructure is developed, more jobs are created, GDP increases and so there is an increase in long term economic growth.

(Itvnt) Provision of infrastructure

Increased government spending on infrastructure means that the cost of production decreases and so supply increases, firms lower selling prices and international competitiveness improves.

(Itvnt) Industrial Policies

Industrial policies are direct and targeted support to firms or industries in the forms of subsides, so costs of production decrease, supply increases, firms lower selling prices and international competitiveness improves.

Demand-side effects of supply-side policies

SS Policies take years and when it is completed it can add extra productive potential to the economy, but requires government spending on an annual basis, which boosts AD. It has been argued that the best government spending is that which boosts AD in the short term, but increases LRAS in the long term.

Supply-side effects of fiscal policies

Many fiscal policies have the ability to improve the productive potential of an economy. The fiscal policy is short term however the supply-side impact occurs in the long run.

Market based pros

Improved resource allocation, no burden on government budget

market based cons

Equity issues, time lags, vested interests, environmental impacts.

Interventionist pros

Direct support of sectors important for growth, improvements in living standards

interventionist cons

Expensive, time lags, political issues.