2 - Market Based Supply Side Policies

Question 1

What are supply side policies?

Answer 1

Policies that focus on increasing supply of goods and services in an economy to encourage greater productivity and faster growth

Question 2

Aims of SS policies

Answer 2

• incentives to work and invest in human capital
• increase labour and capital productivity
• increase occupational and geographical mobility of labour
• increase capital investment and R+D spending
• promote contestability and stimulate innovation (dynamic efficiency)
• encourage start-ups and expansions of businesses especially ones with export potential
  -improve price and non-price competitiveness in global markets
• improve trend rate of sustainable growth of real GDP

Question 3

Examples of market based SS policies

Answer 3

They remove unnecessary gov intervention to free up markets,competitive forces and incentives to increase LR trend growth rate:
- tax cuts
- deregulation/privatisation
- trade liberalisation (reducing tariffs etc.)
- labour market reform (reduce costs of hiring and firing; reducing trade union power)

Question 4

Problems with market based SS policies

Answer 4

• income inequality (tax cuts may benefit high income earners)
• reduced social safety nets (reduced public services, lead to slower LT growth)
• underinvestment in public goods
• market failures (externalities and public goods problems)
• financial instability (due to deregulation and lack of oversight in financial markets)

Question 5

Examples