Ch 18 - Supply Side Policies
^^Supply side policies^^ are government attempts to increase productivity and efficiency in the economy
- if successful, they will shift aggregate supply to the right and enable higher economic growth in the long run
- Supply side policies should increase productivity and shift long-run AS to the right
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^^Free market SSP^^: policies which increase competitiveness and free-market efficiency
- lower income tax rates, reduced power of trade unions
- ^^Privatisation^^: set state owned assets to private sector, improves incentives
- ^^deregulation^^: allows new firms to enter the market open monopolies to competition
- ^^income tax cuts^^: greater incentives to work longer hours
- remove regulations: reduce power of trade unions, minimum wage and regulations
- free trade agreements: reduce tariff barriers and obstacle to trade
- reduce welfare benefits: increase incentive to get a job
- all these factors improve efficiency and competitiveness by extension
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^^Interventionist SSP:^^ government intervention to overcome market failure
- higher government spending on transport, education, and communication
- government provides capital goods and services where it is believed that the market has failed to provide them.
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Benefits of SSP:
- Lower inflation: shifting AS to the right will cause a lower price level
- More efficient economy → SSP will reduce cost-push inflation
- Privatisation leads to more efficiency and lower prices
Lower unemployment: SSP contributes to reducing structural, frictional, and real wage unemployment which reduces the rate of unemployment
Improved economic growth: SSP will increase sustainable rate of economic growth by increasing LRAS, which enables higher rate of economic growth without causing inflation
Improved trade + balance of payments:
Firms export more when productivity increases
Competition is important in an increasingly globalised marketplace
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In deregulation, competition tends to lead to lower prices + better quality of goods and services
- Difficulty: not all industries are amenable to competition. Privatising and deregulation these industries creates a private monopoly who can charge higher prices
- Lower income taxes increases incentive for people to work harder, leading to an increase in labour supply and more output. A cut in corporation tax gives firms more retained profit they can use for investment. (not always the case, incentive isn’t always increased and firms may choose to save profit)
- Labour markets can be regulated through policies such as:
- make it easier to hire/fire workers
- reduce maximum working hours and minimum holiday pay
- enable zero-hour contracts, which allow firms to employ workers when demand is greater
- flexible working hours decrease productivity
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^^Interventionist SSP^^: policies which are based on the idea that the government has a fundamental role to play in actively encouraging growth
Investment in human capital
increases productivity through improving education, labour force and training
education creates positive externalities
Research and development
economies need to study up-to-date with modern developments to develop new production techniques
tax credit: could allow firms to not pay taxes from retained profit spent on R+D
Provision and maintenance of infrastructure: defined as large scale capital provided by the government
necessary for economic activity
productive potential of an economy illustrated by LRAS will be imposed by a better infrastructure
- Direct support for businesses or enterprise
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Limitations for Interventionist SSP:
- significant monetary cost involved
- time lags before an outcome is produced
- depends on politics of the country
- supply SP are long run, but when implemented, some will have short run demand side effects
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Demand side theory: is built in the idea that economic growth is stimulated through demand
- main goal is to continue consumer spending on products → keep the economy afloat
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In market based supply policies, the reduction of household income taxes and corporate taxes will have expansionary fiscal effects
- In interventionist SSP, increased government spending increases AD in the economy and has expansionary fiscal effects
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