Supply side policies Flashcards
(22 cards)
what are supply side policies
policies designed to increase the productive capacity of the economy, shifting LRAS to the right
- if successful, then all 4 main macroeconomic objectives will improve
what are the two types of supply side policies
- interventionist supply side policies
- market based supply side policies
what do interventionist supply side policies do
they correct market failure and promote more government intervention in the economy
what do market based supply side policies do
they try to shift LRAS right wards by reducingbarriers for the private sector
3 generic reasons why the LRAS curve would shift to the right
- increase in the quantity of the factors of production
- increase in the quality of the factors of production
- improvement in the productive efficiency of the economy (reduction in long run costs of production)
examples of interventionist SSP
- Investment in Education & Training → Higher Productivity → LRAS & Growth Increase
Governments increase spending on education and vocational training, improving the skills and qualifications of the workforce → A better-skilled labour force is more productive, leading to higher output per worker → This reduces structural unemployment as workers are trained for modern industries → Businesses benefit from a more efficient and innovative workforce, lowering production costs and improving international competitiveness → The LRAS curve shifts right, increasing the economy’s productive capacity, boosting long-term economic growth. - Investment in Healthcare → Healthier Workforce → Higher Productivity & Growth
Governments invest in better healthcare services, including public hospitals, vaccinations, and preventive care → A healthier workforce means fewer sick days, higher labour participation, and greater productivity per worker → Businesses benefit from lower absenteeism, reducing costs and increasing efficiency → Improved worker longevity and well-being increases labour market participation, further raising output → The LRAS curve shifts right, as the economy becomes more productive and efficient, leading to higher economic growth. - Infrastructure Development → Lower Transport & Production Costs → LRAS & Growth Increase
Government investment in roads, railways, ports, and digital infrastructure (e.g., high-speed internet) reduces transportation and communication costs → This makes it cheaper and faster for businesses to move goods, raw materials, and services → Firms experience lower costs and greater efficiency, increasing international competitiveness and profitability → Better infrastructure attracts foreign direct investment (FDI), as multinational companies prefer locations with strong transport and digital networks → The LRAS curve shifts right, expanding the economy’s productive capacity and boosting long-term economic growth. - Research & Development (R&D) Investment → Innovation → Higher Productivity & Growth
Governments fund research institutions, universities, and private sector innovation to encourage technological advancements → New technologies improve efficiency in production, reducing costs and increasing output (dynamic efficiency) → Innovations create new industries and job opportunities, reducing structural unemployment and boosting competitiveness → Countries with strong R&D experience faster technological progress, giving them a competitive advantage in global markets → The LRAS curve shifts right, as the economy grows more productive and innovative, leading to sustained economic growth. - State Support for Key Industries → Industrial Growth → Higher LRAS & Economic Expansion
Governments provide subsidies, grants, or tax breaks to industries that are essential for national economic growth (e.g., renewable energy, semiconductor manufacturing, green technologies) → This helps infant industries develop, allowing them to compete globally → Strategic government support can drive export growth, bringing in foreign currency and reducing trade deficits → As supported industries expand, they create jobs, increase output, and encourage further investment → The LRAS curve shifts right, as the economy experiences higher productivity, employment, and output, leading to stronger long-term growth.
examples of market based SSPs (tax reform)
tax reform :
- lower income tax
Lowering income tax rates increases the incentive for individuals to work, as they get to keep a larger share of their earnings → This leads to an increase in labour force participation and a rise in working hours, particularly among those who may have previously avoided work due to high taxation (e.g., second earners in households) → A larger and more productive workforce leads to higher aggregate supply (LRAS shifts right) → This increases potential output, boosting long-term economic growth.
Cutting Corporation Tax → Increased Investment → Higher Productivity & Growth
Reducing corporation tax increases the post-tax profits that businesses retain → This gives firms more financial resources to invest in capital goods, research & development (R&D), and innovation → Investment in new technology and machinery leads to higher productivity, reducing unit costs → This makes firms more internationally competitive, boosting exports and economic growth → The LRAS curve shifts right, reflecting an increase in productive capacity.
- Lowering Capital Gains Tax → More Entrepreneurship & Start-ups → Innovation & Growth
Reducing capital gains tax (tax on profits from investments, including business sales) makes entrepreneurship and risk-taking more attractive → More individuals and investors are willing to start businesses, as the potential rewards from success are higher → Increased business creation leads to greater innovation, job creation, and higher aggregate supply → Over time, this increases dynamic efficiency, allowing LRAS to shift right, fostering long-term economic growth. - Reducing Indirect Taxes on Investment Goods → Lower Costs → More Capital Formation
Lowering or removing sales taxes (e.g., VAT) on machinery, equipment, and business inputs reduces the cost of investment for firms → This makes it cheaper for businesses to purchase capital goods, leading to higher investment in productivity-enhancing technology → As firms upgrade to more efficient capital stock, unit costs fall, and output per worker rises → This leads to a rightward shift in LRAS, contributing to sustained economic growth.
examples of market based SSPs(labour market reform)
Decrease in welfare:
If unemployment benefits are too high, some individuals may choose not to actively seek work, reducing the available labour supply → Lowering benefits increases the incentive to find employment, leading to a more efficient allocation of labour resources → This reduces unemployment and increases the number of people contributing to output → A larger and more active workforce leads to an increase in productive potential, shifting LRAS outward and fostering higher economic growth.
- However, it may increase inequality and reduce the standard of living for vulnerable groups, especially if jobs are scarce or poorly paid.
Reducing Minimum Wage
- Lowering or removing minimum wage laws allows businesses to hire workers at lower costs, which can boost employment opportunities, especially for low-skilled workers.
By reducing employment regulations, businesses face lower hiring costs, making them more willing to recruit new employees → This leads to higher job creation, reducing long-term unemployment and allowing firms to operate more efficiently → With more workers employed, productive capacity increase
- Conversely, it risks increasing in-work poverty and reducing consumer spending due to lower incomes.
Reducing Trade Union Power:
Strong trade unions can increase wage rigidity, making it harder for firms to adjust wages in response to economic conditions → Reducing trade union power allows firms to set wages more flexibly, making it easier to hire workers during downturns → This improves labour market efficiency, reducing real-wage unemployment and ensuring that labour is allocated where it is most needed → A more responsive labour market leads to higher employment, greater efficiency, and an outward shift in LRAS, supporting sustained economic growth.
Reducing Income Tax as a Supply-Side Policy → Economic Growth
Cutting income tax increases individuals’ post-tax income
→ Creates a greater incentive to work, as more of each extra £ earned is kept
→ Increases labour supply and productivity, as workers may choose longer hours or join the workforce
→ Higher productive capacity boosts long-run aggregate supply (LRAS), leading to sustainable economic growth
examples of market based SSPs(competition policy)
- privatisation - Privatized firms often operate more efficiently than their state-owned counterparts due to profit-driven decision-making, leading to cost reductions, streamlined operations, and improved productivity. Privatization encourages innovation as firms seek to differentiate themselves and gain competitive advantages in the market.
- Privatization can attract private investment in infrastructure projects and industries previously monopolized by the state. Private investors may inject capital, technology, and expertise to upgrade infrastructure and expand capacity.
- deregulation - Deregulation promotes competition by removing entry barriers, price controls, and restrictions on market entry and exit.
- Increased competition incentivizes firms to innovate, invest in productivity-enhancing technologies, and adopt best practices to gain market share. Deregulation fosters a dynamic business environment where firms compete based on efficiency, quality, and innovation, driving productivity improvements across industries.
- trade liberalisation
: Increased access to global markets expands export opportunities for domestic firms, allowing them to reach larger customer bases and access foreign inputs and technologies. Export-oriented firms tend to be more productive, innovative, and competitive, driving productivity growth in the economy.
evaluation points for SSPs
⚠️ 1. Time Lags
Many SSPs (like education or infrastructure investment) take years to yield results
→ Labour force productivity or mobility may not improve immediately
→ Short-term unemployment or inefficiencies may persist
→ Limits the immediate effectiveness of SSPs during a recession
💰 2. High Opportunity Cost
Supply-side policies often require large public spending (e.g. on education or healthcare)
→ Government may need to cut spending elsewhere or increase taxes
→ This could worsen inequality or reduce investment in other vital areas
→ Weakens the net benefit of SSPs if not well-targeted
🏛️ 3. Depends on Business Confidence
Tax cuts or deregulation aim to boost investment
→ But if confidence is low (e.g. during uncertainty), firms may still not invest
→ Policy fails to stimulate growth or job creation
→ Limits effectiveness of market-based SSPs in economic downturns
🏫 4. Poor Policy Design or Implementation
Training schemes or education reform may be poorly targeted
→ Skills mismatch persists or schemes fail to reach those most in need
→ Structural unemployment remains despite increased spending
→ Wastes resources and leads to limited improvements in productivity
🌍 5. Globalisation Weakens Impact
Even with improved domestic productivity, firms may still offshore to cheaper countries
→ Local job creation is limited despite SSP efforts
→ Reduces long-term development impact
→ Especially relevant for developing countries with weak industrial bases
🧾 6. Inequality May Rise (Free-Market SSPs)
Reducing welfare or labour protection (to incentivise work) can worsen income inequality
→ May increase relative poverty and reduce social mobility
→ Weakens long-term development goals like improved living standards
→ Could also reduce aggregate demand in the short term
disadvantages of deregulation
🧑⚖️ 2. Worsens Inequality
Labour market deregulation may reduce worker protections (e.g. minimum wage, job security)
→ Firms may cut wages or use zero-hour contracts to reduce costs
→ Increases income and wealth inequality
→ Leads to social tensions and reduces inclusive development
📉 3. Can Lead to Short-Term Job Losses in Some Sectors
Deregulation often removes protections for uncompetitive firms or industries
→ Inefficient firms may shut down or downsize due to increased competition
→ Structural unemployment rises in the short term
→ Increases benefit spending and reduces confidence in affected regions
🔥 4. Risk of Financial Instability (esp. in banking deregulation)
Financial deregulation may allow risky lending or speculative behaviour
→ Can lead to asset bubbles and banking crises (e.g. 2008 financial crisis)
→ Financial instability undermines investment and long-run growth
→ Requires costly bailouts or government intervention
🌍 5. Environmental Degradation
Deregulation can reduce environmental protections (e.g. emissions limits, pollution controls)
→ Firms may ignore environmental externalities to cut costs and boost profits
→ Increases air, water, and soil pollution, especially in heavy industries
→ Harms public health, biodiversity, and long-term sustainable development
📉 6. Decline in Product Quality
Removing regulations around safety standards or quality control lowers compliance costs
→ Firms may cut corners to maximise profits
→ Leads to unsafe or low-quality products (e.g. contaminated food, faulty goods)
→ Damages consumer trust, exports, and international reputation
💸 7. Worsens Balance of Payments in Some Cases
Deregulation can allow foreign firms to enter more freely without restrictions
→ Domestic firms may struggle to compete, leading to increased imports
→ Trade deficit widens, weakening the current account
→ Pressure on the currency and foreign reserves increases
🏦 8. Can Reduce Government Revenue
Deregulation is often paired with lower business taxation and fewer compliance requirements
→ Short-term government revenues from corporate taxes may fall
→ Limits funding for public services like education, healthcare, or infrastructure
→ May worsen inequality and reduce inclusive development
⚠️ 9. Increases Volatility in Labour Markets
Fewer employment protections mean wages and contracts can adjust rapidly
→ While flexible, this can lead to job insecurity and unstable income
→ Reduces consumer confidence and spending
→ Slows down aggregate demand and economic stability
examples of how SSps have helped UK economy, market based
One of the most successful privatization examples is the telecommunications industry. In the 1980s, many countries around the world began to privatize their telecommunications industries. The United Kingdom was one of the first countries to do so, and it was a huge success. The privatization of British Telecom (BT) led to an increase in competition, which resulted in lower prices and improved services. The government also received a significant amount of revenue from the sale of BT shares.
- Another successful privatization example is the airport industry. Many countries have privatized their airports, and the results have been impressive. The privatization of airports has led to increased efficiency, better services, and improved financial performance. For example, the privatization of London Gatwick Airport in 2009 resulted in a significant increase in passenger numbers and revenue.
disadvantages of privatisation
Focus on Profit Over Social Welfare → Neglect of Essential Services
Private firms are driven by the profit motive, whereas public firms often operate in the interest of social welfare → When industries like healthcare, rail transport, or utilities are privatised, firms may prioritise cost-cutting and profitability over service quality → This can lead to underinvestment in infrastructure, staff shortages, and lower service reliability → Consumers may face worse quality services, particularly in areas that are less profitable to serve.
Natural Monopolies
Many industries that are privatised (e.g., rail, energy, water) are natural monopolies, meaning that high fixed costs and infrastructure requirements make competition impractical → After privatisation, instead of increasing competition, these industries may simply become privately-owned monopolies, leading to price-gouging, inefficiency, and reduced consumer welfare → Without strong government regulation, firms may engage in excessive profit-seeking behaviour, harming both consumers and businesses that rely on their services.
- This harms allocative efficiency and reduces consumer welfare.
Short-Term Profit Focus
- Privatised firms might focus on short-term profits rather than long-term investments, such as infrastructure development or technological advancements.
- This undermines dynamic efficiency and could lead to deterioration in service quality over time.
Job Losses
3. Job Losses & Poorer Working Conditions → Labour Market Issues
State-owned enterprises often provide secure employment and good working conditions due to government backing → After privatisation, firms seek to reduce costs, which often means cutting jobs, reducing wages, or weakening employment protections → This increases job insecurity and may worsen working conditions → In the long run, this can lead to higher income inequality and social unrest, particularly in industries with high public sector employment.
- This has social and economic consequences, including increased welfare dependency and reduced aggregate demand.
Loss of Government Revenue
- Privatising profitable state-owned enterprises means the government loses a steady income stream from dividends. This may result in higher taxes or reduced public spending elsewhere.
In the long run, this could limit fiscal flexibility and harm economic stability.
Wealth Inequality
- The sale of public assets often benefits wealthy investors or corporations, especially when shares are underpriced during privatisation.
- This concentrates wealth further and reduces opportunities for ordinary citizens to benefit from public resources.
Job Losses & Poorer Working Conditions → Labour Market Issues
State-owned enterprises often provide secure employment and good working conditions due to government backing → After privatisation, firms seek to reduce costs, which often means cutting jobs, reducing wages, or weakening employment protections → This increases job insecurity and may worsen working conditions → In the long run, this can lead to higher income inequality and social unrest, particularly in industries with high public sector employment.
- Risk of Monopoly Power
Privatised firms may operate in markets with high barriers to entry →
Can lead to private monopolies exploiting consumers →
Results in higher prices, restricted output and x-inefficiency →
Reduces allocative and productive efficiency
- Loss of Universal Access
Profit-focused firms may cut services in unprofitable areas (e.g. rural transport, broadband) →
Leads to unequal access to essential services →
Disadvantages low-income or remote communities →
Worsens social inequality and regional disparities
- Underinvestment in Public Interest
Private firms may prioritise shareholder returns over long-term investment →
Can result in underinvestment in infrastructure or maintenance →
Long-run decline in service quality and reliability (e.g. rail, water) →
Harms future growth and public welfare
- Short-Termism and Asset Stripping
Firms may focus on short-term profits (e.g. cutting staff, selling off land) →
Damages long-term capacity and employee morale →
Can lead to job losses and poorer working conditions →
Reduces dynamic efficiency and social outcomes
how can an increase in infrastructure help lras
🚆 1. Improves Transport Efficiency
Government invests in roads, rail, ports, or airports
→ Reduces transport times and costs for businesses
→ Improves supply chain reliability and logistics
→ Increases productive capacity → LRAS shifts right → long-run growth
🔌 2. Boosts Private Sector Productivity
Better infrastructure (like power grids and internet access) supports business operations
→ Reduces downtime, increases efficiency and output
→ Firms become more competitive and productive
→ Encourages output growth → GDP increases
🏗️ 3. Crowds in Private Investment
Improved infrastructure lowers operating costs and risk for firms
→ Attracts domestic and foreign investment
→ Increases capital formation and technology use
→ Expands long-run aggregate supply → sustainable growth
👷 4. Creates Jobs in Construction and Related Sectors
Infrastructure projects directly increase demand for labour and materials
→ Reduces unemployment in short run (demand-side effect)
→ Boosts incomes and consumption → AD shifts right
→ Multiplier effect leads to actual growth and greater utilisation of capacity
how can an increase in education and training programs help lras
Higher Labor Productivity
Education and training improve workers’ skills and knowledge, enhancing their productivity.
Skilled workers can produce more output in the same amount of time, increasing efficiency and reducing unit labor costs.
Impact: LRAS) shifts outward, enabling higher potential output and sustainable economic growth.
Improved Workforce Flexibility
Training programs can help workers adapt to changing industries and technologies.
By reskilling and upskilling, the workforce becomes more versatile, reducing structural unemployment and better aligning labor supply with demand.
An adaptable workforce increases the economy’s capacity to respond to shocks, enhancing LRAS.
Reduced Income Inequality
Access to education and training can help reduce wage disparities.
With better skills, low-income workers can access higher-paying jobs, improving overall living standards and labor market participation.
A more inclusive labor market increases economic capacity, further contributing to LRAS growth.
Regulatory Frameworks for Innovation
- Governments can establish regulatory frameworks that foster innovation and entrepreneurship by providing clarity, certainty, and incentives for risk-taking.
- Clear and predictable regulations can encourage firms to invest in innovative projects by reducing uncertainty and regulatory risks.
- : Strong intellectual property rights protections incentivize innovation by ensuring that innovators can capture the benefits of their inventions, encouraging further investment in R&D.
- Well-designed regulations can promote competition by preventing monopolistic behaviour and encouraging entry and participation by new firms, fostering dynamic and innovative markets.
real life examples of SSPs being used in the UK and Nigeria
🏫 1. Apprenticeship Levy (2017 – Interventionist)
Year introduced: 2017
Policy: UK employers with a wage bill over £3 million must pay a levy to fund apprenticeships.
Goal: Increase human capital, reduce skills shortages, and improve labour productivity.
Evaluation: Mixed results — some firms see it as a tax, others improved training outcomes.
💼 2. Welfare Reform – Universal Credit (Rolled out from 2013 – Market-based)
Year introduced: Piloted in 2013, expanded in later years.
Policy: Combines six benefits into one payment, aiming to incentivise work.
Goal: Reduce the unemployment trap, improve labour market flexibility.
Evaluation: Critics say delays and payment issues worsened poverty, though work incentives improved for some.
🛣️ 3. Infrastructure Investment – HS2 Project (Announced 2010, ongoing – Interventionist)
Start year: 2010
Policy: High-speed rail linking London to the North to reduce regional inequality and boost geographical mobility.
Goal: Improve productive capacity and reduce congestion.
Evaluation: Very high cost, delays and partial cancellations, but some future productivity gains expected.
🏛️ 4. Corporate Tax Cuts (2010–2017 – Market-based)
Years: From 28% in 2010 to 19% by 2017.
Goal: Attract foreign direct investment, stimulate private sector growth, increase incentive to invest.
Evaluation: Helped boost business confidence, but impact on productivity growth unclear.
🇳🇬 Nigeria – Supply-Side Policies
⚡ 1. Presidential Power Initiative (2020 – Interventionist)
Start year: 2020 (with Siemens)
Policy: Aims to expand and modernise Nigeria’s electricity grid.
Goal: Solve chronic power shortages, improve productivity across all sectors.
Evaluation: Implementation slow, but critical for long-term growth.
🏫 2. National Social Investment Programmes (2016 – Interventionist)
Launched: 2016
Components: N-Power (skills for graduates), school feeding programme, and more.
Goal: Boost human capital, reduce poverty, and increase employability.
Evaluation: Some success in reaching vulnerable groups, but corruption and mismanagement concerns remain.
💵 3. Trade Liberalisation & Removal of Fuel Subsidies (2023 – Market-based)
Year: 2023 under President Tinubu
Policy: Scrapped fuel subsidies to reduce fiscal burden and liberalised forex market.
Goal: Encourage efficient resource allocation, remove price distortions.
Evaluation: Inflation rose sharply, causing public backlash, but seen as a long-term SSP to improve efficiency.
🏭 4. Special Economic Zones (SEZs) – Ongoing since 2005 (Market-based)
Policy: Tax incentives and infrastructure investment in zones like Lekki Free Trade Zone.
Goal: Attract FDI, boost exports, develop manufacturing.
Evaluation: Patchy success — some SEZs underutilised, but others showed promise (e.g. Dangote Refinery zone).
disadvantages of interventionist ssps
- oppurtunity cost, infrastructure projects can be costly and subject to delays and cost overruns, leading to inefficient allocation of resources and taxpayer money. For example, the HS2 railway project has faced criticism for its escalating costs and environmental impact
- long term sustainability- continuous govt spending on these may lead to public debt, may become unsustainable like HS2
- they do not always acheive their intended goal, eg training programs may not always align with market needs, could lead to a mismatch between skills and job opportunities (occupational immobility)
what is privatisation
involves transferring ownership and control of state owned enterprises to private entities
what is deregulation
involves removing or relaxing government regulations and restrictions on business activities
deregulation chain of analysis
📉 1. Increased Competition and Lower Prices
Deregulation removes restrictions and barriers to entry, encouraging new firms to enter the market
➡️ This leads to increased competition among firms, which puts pressure on existing companies to reduce prices, less inflation
➡️ Lower prices benefit consumers, increasing their purchasing power and leading to higher consumer satisfaction
➡️ The economy sees an overall increase in welfare as consumers access more affordable goods and services
🏢 2. Improved Efficiency and Innovation
By removing unnecessary regulatory constraints, firms have more freedom to operate efficiently
➡️ Firms can focus on reducing costs, improving productivity, and innovating their products and services
➡️ Increased innovation drives growth in sectors like technology, healthcare, and energy, which boosts overall economic development
➡️ As firms become more efficient, the economy grows faster with fewer inefficiencies, also improved international competitiveness
💵 3. Attraction of Foreign Investment
Deregulation often makes the market more attractive to foreign investors, who seek less restrictive business environments
➡️ Higher foreign direct investment (FDI) leads to an increase in capital inflows
➡️ This supports economic growth, increases employment, and helps develop industries by providing new technology, knowledge, and expertise
➡️ A greater inflow of investment can also lead to job creation and better economic integration globally
🏗️ 4. More Job Opportunities
With fewer regulations, firms can hire more workers, expand their businesses, and increase output
➡️ This results in job creation, especially in sectors like services, construction, and finance
➡️ A dynamic labour market can attract skilled workers from other countries, improving overall workforce quality and boosting economic growth
➡️ The reduction in unemployment contributes to higher consumer spending, which in turn drives economic expansion
💼 5. Reduction in Compliance Costs for Businesses
Deregulation reduces the cost of compliance for firms, as they no longer have to meet excessive government-imposed standards
➡️ Firms can allocate more resources to production, expansion, and R&D rather than compliance and administrative expenses
➡️ These savings help improve the profitability of firms and can also lead to lower prices for consumers
➡️ The economy becomes more cost-efficient, and firms are better positioned to take on competitive challenges
privatisation chain of analysis
💼 1. Increases Efficiency
Privatisation transfers ownership from government to private firms
→ Private firms face profit incentives and competitive pressures
→ This encourages cost-cutting, innovation, and productive efficiency
→ Increases output capacity → shifts LRAS right → boosts long-run economic growth
📈 2. Raises Productivity
Private firms are more likely to invest in modern technology and management systems
→ Leads to higher labour and capital productivity
→ Improved resource allocation and output per worker
→ Higher potential output → sustainable economic growth
💰 3. Increases Government Revenue (Short-Term Boost)
Selling off state-owned enterprises raises immediate government revenue
→ Reduces need for borrowing or allows reinvestment in infrastructure/education
→ Stimulates long-term growth through improved human and physical capital
→ Multiplier effect can also support demand-side growth in short term
🌍 4. Attracts FDI
Privatisation can signal a pro-business environment to foreign investors
→ Increases confidence and attracts FDI inflows
→ Brings in capital, technology, and expertise
→ Boosts productive capacity and integration into global markets → growth
