SUPPLY SIDE POLICY

Supply-side policy

Government policies designed to increase the productive capacity of the economy by increasing the quantity or quality of factors of production and shifting LRAS right.

Privatisation

Selling state-owned businesses to the private sector to increase competition and efficiency.

Privatisation effect

Increased competition → greater efficiency → lower costs → higher productivity → LRAS shifts right.

Privatisation evaluation

Natural monopolies may remain uncompetitive, limiting efficiency gains.

Education

Government investment in schools, colleges and universities to improve human capital.

Education effect

Better skills → higher labour productivity → increased output → LRAS shifts right.

Education evaluation

Significant time lags before workers enter the labour force.

Deregulation

Removal or reduction of government rules and regulations affecting firms.

Deregulation effect

Lower compliance costs → firms invest and expand → productivity rises → LRAS shifts right.

Deregulation evaluation

Excessive deregulation may lead to poorer working conditions or market failure.

Labour market reforms

Policies that increase labour flexibility and reduce barriers to employment.

Labour market reforms effect

Greater labour mobility and flexibility → lower structural unemployment → higher productive capacity.

Labour market reforms evaluation

Reduced worker protection may lower morale and productivity.

Enterprise zones

Areas where firms receive tax incentives and reduced planning restrictions.

Enterprise zones effect

Attract businesses and investment → employment rises → local economic growth increases.

Enterprise zones evaluation

May simply relocate firms from other areas rather than create new activity.

Tax cuts

Reductions in income tax or corporation tax to improve incentives.

Tax cuts effect

Greater incentive to work and invest → productivity and investment rise → LRAS shifts right.

Tax cuts evaluation

Impact depends on confidence and willingness of firms and workers to respond.

Trade union reform

Policies that reduce the bargaining power of trade unions and increase labour market flexibility.

Trade union reform effect

Lower labour costs and increased flexibility → firms become more competitive → LRAS shifts right.

Trade union reform evaluation

Can increase inequality and reduce worker motivation.

Subsidies

Government grants or financial support to firms.

Subsidies effect

Lower production costs → increased investment and innovation → productivity rises → LRAS shifts right.

Subsidies evaluation

Expensive for the government and may support inefficient firms.

Supply-side policy diagram

Draw AD, SRAS and LRAS. Shift LRAS right from LRAS1 to LRAS2. Show higher real GDP and lower inflationary pressure.

Education example

Government funding of apprenticeships and universities.

Privatisation example

Privatisation of British Telecom.

Deregulation example

Reducing planning restrictions on businesses.

Labour market reform example

Making hiring and firing workers easier.

Enterprise zone example

Tax incentives in designated regeneration areas.

Tax cut example

Reduction in corporation tax.

Trade union reform example

Restrictions on strike action.

Subsidy example

Government support for renewable energy firms.

Best evaluation for any supply-side policy

Effectiveness depends on time lags, government cost, business confidence and the scale of the policy.