Supply-Side Policies Flashcards
What are supply-side policies?
Policies that aim to expand the productive potential of the economy.
What are market-based policies?
Policies that aim to remove factors that prevent the market from growing successfully. E.g. encouraging people to work or removing barriers to efficient production. Market-based policies have minimum government interference in markets.
What are interventionalist policies?
Policies designed to correct market failure. E.g. reducing the negative externalities of markets. These involve government interference.
What are some policies governments can use to incentivise work and investment (5)?
1) Lowering the marginal income tax rate.
2) Reducing welfare benefits.
3) Subsidising work credit - tax credits.
4) Lowering corporation tax so firms have more to invest.
5) Off-setting research and development investment against corporation tax.
What is the poverty trap?
The small or negative gain that a low-paid employee may experience as a result of promotion, that leads to a loss of benefits or from moving into a higher tax bracket.
What is the unemployment trap?
When the benefits of employment are outweighed by unemployment benefits.
What are the 5 types of supply-side policies?
1) Incentivising work and investment.
2) Promotion of competition.
3) Improvement of infrastructure.
4) Reform of the labour market.
5) Improvement of the quality of the labour market.
What are the effects of a lack of competition (3)?
1) High prices.
2) Low quality of goods and services.
3) A lack of innovation.
What policies can the government use to promote competition (4)?
1) Privatisation.
2) Deregulation.
3) Competition policy to reduce the power of monopolies.
4) Industrial policy to support firms that have a significant impact on economic growth.
What are the impacts of poor infrastructure (2)?
1) Low productivity.
2) Labour immobility.
What are examples of an improvement of infrastructure (4)?
1) HS2 railway.
2) Building a third runway at Heathrow.
3) Provision of utilities, e.g. the supply of gas and electricity.
4) Provision of information, e.g. ensuring access to fast information, such as broadband.
What policies can governments use to reform the labour market to increase flexibility (3)?
1) Improve geographical flexibility by improving transport links and providing affordable houses in order to improve the willingness of workers to relocate/travel to work.
2) Improve external numerical flexibility, making it easier for firms to adjust their workforce, e.g. using flexible contracts.
3) Improving wage flexibility, so wages can be adjusted according to supply and demand. E.g. reducing the power of trade unions.
What policies can governments use to reform the quality of the labour force (3)?
1) Investing in education, resulting in an increase in the skills of the labour force.
2) Investing in training, increasing the skills and productivity of the workforce.
3) Encouraging immigration, reducing skills shortages and increasing the size of the workforce.
What are the potential weaknesses of supply-side policies (8)?
1) Time-lags: Some policies take significant time to be effective, e.g. investment in training and education.
2) High costs: Some policies may be expensive to implement, e.g. HS2 is estimated to cost approx. £42 billion.
3) Policies of competing nations: If foreign nations’ policies are more effective, we will not see the anticipated gains in international trade.
4) Likelihood of government failure: Supply-side policies may not have the desired outcome due to unwise and inefficient spending.
5) Resistance of interest groups.
6) Increased poverty: E.g. a reduction of welfare benefits to try to incentivise people to work.
7) Increase in inequality: E.g. deregulation and trade union intervention can increase inequality.
8) Environmental damages: E.g. from the building of a new runway.
What are the benefits of supply-side policies (4)?
1) Increasing the trend rate of economic growth, shifting LRAS to the right, making it easier to achieve macroeconomic objectives.
2) Supply-side policies are effective at reducing inflation.
3) Can be targeted to deal with structural unemployment.
4) Supply-side policies may include government spending, increasing AD.
