3.13 - supply side policies

goals of supply side policies

• promote long-term growth

• increase productive capacity of economy

• improve competition and efficiency

• reduce costs of labour and reduce unemployment

• greater labour market flexibility

• lower costs of production

• reduce inflation

labour market flexibility

ability of the labor market to respond efficiently to changes in demand and supply conditions

types of supply side policies

• market based supply side policy

• interventionism

market based supply side policies

• encouraging competition

• labour market reforms

• incentive-related policies

encouraging competition; market based supply side policy

greater competition = reduction of costs = greater efficiency of production & improved resource allocation

• potential output increases

• LRAS curve shifts right

privatization

the transfer of public sector assets or services to private ownership

deregulation

the removal or simplification of government rules and regulations that control how private sector businesses can operate.

labour market reforms; market based supply side policy

increasing labour market flexibility

or

reducing labour market rigidities

• abolishing minimum wage legislation

• weakening the power of trade unions

• reducing unemployment benefits

• reducing job security

incentive-related policies; market based supply side policy

policies aimed at encouraging production and investment through tax cutting

• lower personal income taxes

• lowering taxes on capital gains and interest income

• lowering business taxes

capital gains

taxes on profits from financial investments or buying and selling real estate

interventionist supply side policy

increasing productivity and efficiency through investment, education, and infrastructure development.

• (short term increase in AD, long term increase in potential output = shift LRAS/ AS to right)

forms of intervention supply side policies

• investment in human capital

  • training and education

  • improved health care services and access

• investment in new technology

  • R&D

• investment in infrastructure

• industrial policies

industrial supply side policies

government policies designed to support the growth of the industrial sector of an economy

forms of industrial supply side polices

• support for small and medium sized enterprises or firms (SMEs)

  • tax exemptions

  • grants

  • low-interest loans

  • business guidance

• support for infant industries

  • grants

  • subsidies

  • tax exemptions

  • tariffs/ protection against exports

constraints on market-based supply side policy

• time lags

• possible unfavorable impact on unemployment

• possible negative impact on equity

• negative impacts on the government budget

• possible negative effects on the environment

strengths of market based supply-side policies

• improved resource allocation

• may not burden government budget

• ability to create employment

• ability to reduce inflationary pressure

constraints on interventionist supply-side policies

• time lags

• negative impact on government budgets

strengths of interventionist supply-side policies

• direct support of sectors important for growth

• ability to create employment

  • enabling workers to aquire skills

  • providing assistance to workers to relocate

  • providing information that reduces unemployment

• ability to reduce inflationary pressure

• possible positive effects on equity

main difference between demand-side and supply-side policies

demand-side → affecting short-term fluctuations of AD

supply-side → affecting long run LRAS/AS