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What are supply side policies?
Policies which aim to make markets more competitive and efficient, increase production potential and shift the LRAS curve to the right.
What are supply side improvements?
Reforms undertaken by the private sector to increase productivity so as to reduce costs and to become more efficient and competitive. Supply side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government.
What is different between supply side policy and supply side improvements?
Supply side improvements are undertaken by the private sector itself as a result of entrepreneurs realising they must make their firms more efficient and competitive, whereas supply side policies are part of the means to achieve the desirable outcomes.
What is interventionist supply side policies?
Occurs when the government intervenes in, and sometimes replaces, free markets. Interventionist supply side policies include government funding of research and development.
What are market based supply side policies?
Market-based policies limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used
What are the uses of market based policies?
o To increase incentives
- Reducing income and corporation tax to encourage spending and investment. This could increase the long run productive potential of the economy, especially if labour and capital becomes more productive. This improves the underlying trend of economic growth.
o To promote competition
- By deregulating or privatising the public sector, firms can compete in a competitive market, which should also help improve economic efficiency.
o To reform the labour market
- Reducing the NMW (or abolishing it altogether) will allow free market forces to allocate wages and the labour market should clears. Reducing trade union power makes employing workers less restrictive and it increases the mobility of labour. This makes the labour market more efficient.
What are the uses of interventionist policies?
o To promote competition
- A stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete, too.
o To reform the labour market
- Governments could try and improve the geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information.
o To improve skills and quality of the labour force
- The government could subsidise training or spend more on education. This also lowers costs for firms, since they will have to train fewer workers.
- Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity.
o To improve infrastructure
- Governments could spend more on infrastructure, such as improving roads and schools.
What is the Laffer curve?
(page 481) Shows how the government total revenue changes as the average tax return increases from 0% to 100%.
Explain the Laffer curve?
Between the limiting tax rates of 0% and 100%, the Laffer curve shows tax revenue first rising and then falling as the average rate of taxation increases, which in the diagram occurs at an average tax rate of 50%. Beyond this point, any further increase in the average tax rate becomes counterproductive, causing total tax revenue to fall.
Role of supply side policies on the rate of inflation?
Its argued that by reducing businesses costs of production and by reducing monopoly profits through making markets more price competitive, supply side policies reduce cost push inflationary pressures. By enabling productive capacity to grow in line with aggregate demand, successful supply side policies also help reduce demand pull inflation pressures.
Role of supply side policies on balance of payments?
Highly competitive firms, which invest in product design and state of the art technology and methods of production, end up producing high quality goods which customers demand. Taken together, increased price and quality competitiveness give the country a competitive edge, both in domestic and overseas markets. With domestic customers switching to high quality hot produced goods and overseas residents buying more of the country's exports, the country's balance of payments on current account should improve.
Examples of industrial policy measures?
- Privatisation
- Marketisation (or commercialisation)
- Deregulation
- Internal markets
- Subsidising spending on research and development
Examples of labour market measures?
- Lower rates of income tax
- Reducing state welfare benefits relative to average earnings
- Changing employment law to reduce the power of trade unions
- Repealing legislation which limits employer's freedom to employ
- More flexible pension arrangements
- Improving the training of labour
Example of financial and capital market measures?
- Deregulating financial markets
- Encouraging saving
- Promoting entrepreneurship
- Reducing public spending and public sector borrowing
