Supply Side Policies( Interventionist and Market Based) with Evaluation Flashcards
(26 cards)
What are supply-side policies in economics?
Policies designed to increase the productive capacity of the economy by shifting the long-run aggregate supply (LRAS) curve to the right. They aim to boost long-term growth, reduce unemployment, and lower inflation.
What are the two types of supply-side policies?
Interventionist supply-side policies – Involve government action to correct market failure.
Market-based supply-side policies – Focus on reducing government intervention to let markets operate freely.
Give examples of interventionist supply-side policies.
Increased spending on education and training
Investment in infrastructure
Industrial policy support (e.g., subsidies)
Healthcare spending to improve labour productivity
Give examples of market-based supply-side policies.
Lower income and corporation tax rates
Deregulation
Privatisation
Labour market reforms (e.g., reducing trade union power)
How can supply-side policies help achieve macroeconomic goals?
Economic growth: Boost productive potential (LRAS)
Lower unemployment: Improve employability and labour market flexibility
Low inflation: Cost reductions shift LRAS right, lowering price pressures
Improved trade balance: Increased competitiveness and exports
Evaluate the effectiveness of interventionist supply-side policies.
Pros: Directly address market failures (e.g., underinvestment in skills), long-term gains
Cons: High government spending, risk of inefficiency or poor allocation
Time lag: May take years to show effects
Opportunity cost: Spending could be used elsewhere
Evaluate the effectiveness of market-based supply-side policies.
Pros: Encourage innovation, efficiency, and private sector-led growth
Cons: May increase inequality, not all sectors respond equally
Depends on: How competitive the markets are, how responsive firms are to incentives
What diagram shows the effect of successful supply-side policies?
AD–AS model: Rightward shift of LRAS from LRAS1 to LRAS2, leading to higher Real GDP (Yf to Y2), lower unemployment, and reduced inflation.
What causes LRAS to shift to the right?
An increase in the quantity and/or quality of factors of production (land, labour, capital, enterprise), leading to greater productive potential in the economy.
How does government spending on education and training shift LRAS?
Builds human capital
Improves labour productivity
Reduces structural unemployment
Long-term economic growth
Examples: building schools, hiring and training teachers, curriculum development, adult training programs
Evaluation:
Expensive, long time lag
Quality depends on implementation
Risk of mismatch between training and job market needs
How does healthcare spending act as a supply-side policy?
Back:
Improves quality of labour
Healthier workers = more productive
Reduces absenteeism and increases efficiency
Evaluation:
Expensive, time lag
Effectiveness depends on health system efficiency
How does infrastructure investment increase LRAS?
Back:
Improves transport efficiency (roads, rail, ports, airports)
Reduces costs of production and time
Boosts access to raw materials and markets
Increases quantity of capital stock (e.g., hospitals, schools)
Evaluation:
High cost, significant time lag
May be politically influenced rather than economically optimal
How do subsidies encourage long-term economic growth?
Back:
Encourage firms to invest in new technology and capital
Increases productivity and capital quality
Lowers long-run costs of production
Drives innovation and competitiveness
Evaluation:
Risk of government failure (supporting inefficient firms)
May lead to dependency on subsidies
Opportunity cost of funding
What are market-based supply-side policies?
Policies that aim to increase the productive capacity of the economy by reducing government intervention, improving market efficiency, and increasing private sector incentives. These shift LRAS to the right.
Grouped into:
Tax reform
Labour market reform
Policies to boost competition
How does cutting income tax help increase LRAS?
Increases incentives to work and be more productive
Attracts people back into the labour force
Raises the quantity and quality of labour
More disposable income = greater motivation
Evaluation:
May increase inequality
Depends on how responsive labour is (elasticity of supply of labour)
Risk of reduced tax revenues (Laffer curve debate)
How does cutting corporation tax help increase LRAS?
Increases retained profits
Encourages business investment and capital accumulation
Leads to innovation and higher productivity
Evaluation:
May lead to tax competition between countries
May not always translate to real investment
Could reduce government revenue short-term
How does reducing welfare benefits act as a supply-side policy?
Back:
Increases incentive to work
Reduces dependency on the state
Increases the labour force participation rate
Evaluation:
Ethical concerns about poverty and inequality
Could harm vulnerable individuals
Depends on availability of suitable jobs
How can cutting the minimum wage increase LRAS?
Back:
Lowers cost of production for firms
May increase employment and efficiency
Improves competitiveness
Evaluation:
May increase in-work poverty
Reduces incomes of low-paid workers
Impact depends on elasticity of demand for labour
How does reducing trade union power act as a supply-side policy?
Back:
Increases flexibility in the labour market
Reduces wage-push inflation
Encourages hiring and reduces production disruption
Evaluation:
May weaken workers’ rights and job security
Could reduce worker morale and productivity
What are the general strengths and weaknesses of market-based SSPs?
Back:
Strengths:
Encourages efficiency and innovation
Can be self-sustaining with fewer fiscal burdens
Enhances competitiveness
Weaknesses:
Can increase inequality
Results take time to appear
May require strong institutions and well-functioning markets
How does privatisation act as a supply-side policy?
Back:
Transfers firms from public to private ownership
Encourages efficiency due to profit motive
Reduces government burden
Can improve service quality through competition
Evaluation:
Risk of natural monopolies forming
Profit > public interest
Job losses and inequality may rise
How does deregulation improve economic efficiency?
Back:
Removes government rules that limit business activity
Increases freedom to innovate, reduce costs, and compete
Increases firm efficiency and lowers prices
Evaluation:
Risk of under-regulation (e.g., environmental damage, financial risks)
Poor quality control or worker exploitation
How does trade liberalisation work as a supply-side policy?
Back:
Removes tariffs, quotas, and other barriers to trade
Increases imports/exports and global competition
Encourages specialisation and productivity gains
Evaluation:
Domestic industries may struggle to compete
Job losses in uncompetitive sectors
Dependence on external shocks
What are the general disadvantages of supply-side policies?
Back:
No guarantee of success:
Education/healthcare may not boost productivity
Firms may not use subsidies for investment
High opportunity cost:
Government spending is expensive
Funds could be used elsewhere (e.g., welfare)
Time lags:
Infrastructure, education reforms take years to show effects
Negative stakeholder impacts:
Labour market reforms may harm low-income workers
Deregulation may harm the environment or consumer protection
