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)

trade liberalisation RWE

• new Zealand reduce tariff and import restrictions from 1984 onwards

• with tariff falling by around 50% between 1988 and 1992

• increase competition as domestic firms exposed to greater international competition

• domestic firms increase innovation and efficient to remain competitive

• produce more output for same number of inputs to reduce unit cost and increase productive capacity , shifting LRAS righjt

trade liberalisation adv

1. increase comp

2. economies of scale — easier and cheaper for domestic firms to increase export. As production increases , firms bulk purchase raw materials and spread fixed costs over a greater quantity of output , reducing average costs

trade liberalisation disadvantages

1. structural UE

2. negative impact on domestic firms

structural UE

inefficient domestic firms close down or reduce production because they cant compete , displaces low-skilled workers

negative imacpt on domestic firms

After north American free trade agreement came into effect in 1994 , Mexico reduced trade barriers with US. US cheaper corn imports placed pressure on Mexico. Domestic farmers in mexico who were already facing high COP were met with further loss in income. Hence , benefits for consumer but harms producers

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

reduce minimum wage RWE

netherlands in 1984 , government implemented a cut in nominal minimum wage due to declining youth employment . More youths were hired , Labour resource more efficiently used ,increase LRAS

reduce minimum wage adv

reduce real wage employment

reduce minimum wage dadv

income inequality

• US , federal minimum wage has been frozen at $7.25 since 2009 , its real value has fallen and wages of the lowest paid workers have barely grown against higher earners

• widens income inequality gap as Lorenz curve B is further away from th

• Draw Lorenz curve

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

cut in personal income tax adv

1. increase incentive for high skilled workers to work

• lower income tax increase financial rewards for workers earning higher wges

• Singapores top personal income tax rate is 24% , well below top rates in the UK , making it more attractive for high income and skilled works

• increasing economy human capital and productive capacity

cut in personal income tax disadvantage

1. ineffective in raising LRAS by large amount if high skilled workers value leisure over work and want to maintain current SOL

• since higher disposable income due to lesser tax , existing workers dont want to work additional hours as they want to maintain current income and SOL

• quantity od labour supplied (in terms of hours worked) may barely rise , shifting LRAS by a small amount

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