Chapter 18 - Supply Side Policies

What are Supply-side Policies (SSP)

They are policies designed to raise the long run aggregate supply of an economy by raising the Q&Q of the FoP

Aims of SSP

• achieve long term EG by improving the productive capacity of an economy

• improve competition and efficiency

• raise job flexibility and lower unemployment & labour costs

• inspire firms to invest by lowering costs

effect of SSPs (diagrams)

did you get it?

2 types of SSP

market based SSPs- designed to make markets work better and give more freedom to the private sector

state interventions - to overcome different types of market failures

what are market-based SSP (Part 1)

• reductions in income tac

• reduction in corporation tax

  • leads to increased investment (more capital)

  • OR more R&D and tech advancements (quality)

• Labour market reforms

  • reduce unemployment benefits

  • limit trade union power

  • get rid of minimum wages

• Deregulation (scrap things like maternity leave)

what are market-based SSP (Part 2)

• Privitisation (firms are profit driven)

• Policies to raise competition (anti monopoly laws) (competition raises efficiency)

• Trade liberisation (removing tarrifs & subsidies promotes free trade) (dmestic firms will become more efficient to compete internationally)

What are interventionist SSPs

• investing in human capital (education & training)

• R&D (the G can give tax credits to incentivise investing in this)

• Provision and maintenance of infrastructure (large scale capital)

Limitations of market based SSPs Part 1

• lowering income tax could make people work less if they take more home

• lowering income tax benefits the highest earners the most (income inequality)

• if you lower corporate taxes businesses could just give more to shareholders

• labour market reforms lower living standards for low income/unionised workers

Limitations of market based SSPs Part 2

• Deregulation can:

  • increase env damage if those laws are laxed or affect working conditions if health and safety laws are laxed

• Privatisation needs to be transparent to work AND if the company is a monopoly why strive to be better

• Time lags (DUH)

Limitations of Interventionist SSPs

• Time lags (DUH)

• Opportunity cost whenever the govt spends + rise in debt servicing costs

• interventionist policies change when the political party changes

• Controversies (how man resources should be provided for the Sciences vs the Arta)

What is innovation (feeds into R&D)

• putting a new idea or approach into action

• the commercially successful exploitation of ideas

What are product & process innovation

product - small scale, frequent, little tweaks to the characteristics & performance of a G&S

process - changes to the way in which production takes places or is organised

What is Creative Destruction

• Coined by Joseph Schumpetel

• complete upheaval in the established order in the pursuit of innovation