supply side policies -- market based

market based supply side policies definition

“market based” — focuses on allowing markets to operate more freely , with minimal government intervention

• Aim : raising LRAS by increasing the incentives of different economic agents/households

3 categories of market based

1. policies to encourage competition

2. labour market reforms

3. incentive related policies

policies to encourage competition why?

higher competition among private firms in the market raises productivity and efficiency of profit orientated firms , increasing potential output and shifting the LRAS right

policies encouraging competition sub categories

1. Privatisation

2. Deregulation

3. Anti monopoly regulation

4. trade liberalisation

privatisation definition

involves a transfer of ownership form the government to private owners

deregulation definition

refers to reduction or elimination of govt regulations on an industry

anti monopoly regulations aim

to prevent the formation of monopolies or to break up existing monopolies into individual firms

trade liberalisation

to remove or lower barriers to trade , allowing more import to enter a country (eg. tariffs / quota)

Labour market reforms

refers to policies intended to increase labour market flexibility or reduce labour market rigidity

aim :

• increase comp in the labour market

• lower labour cost and increase employment

• reduce structural UE , allowing potential output to increase

• allow waves to be determined by DD and SS of labour

labour market reform measures

1. reduce labour union power

2. reduce UE benefits

3. Reduce minimum wage

4. Reduce job security

Incentive related policies

involve tax cut, intend to increase incentive of people to work and invest

incentive related policies — cut in personal income taxes

cutting income tax may raise incentive for people to work harder and be more productive , raising potential output of the economy and shifting the LRAS to the right

incentive related policies — reduction in corporate taxes

firms are able to retain more after tax profits to fund investments in machinery, increasing quantity and quality of FOP , increasing productivity and efficiency