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Macroeconomics: Supply-side policies (Market-oriented supply-side policies…
Macroeconomics: Supply-side policies
Supply-side policies:
Are government attempts to increase productivity, make the economy more efficient, and shift aggregate supply to the right. They can be:
1. Interventionist
- Involving government spending to overcome market failure.
2. Market failure -
policies to reduce regulation and allow free markets to function more efficiently.
Supply-side improvements:
This refer to general improvements in the productivity of the economy . Supply-side improvements could be due to private innovation, improved technology or government supply-side policies.
Benefits of supply-side policies
:
Lower unemployment:
Supply-side policies can help reduce structural, frictional, and real-wage unemployment.
Improved economic growth:
Supply-side policies will increase economic growth by increasing LRAS
Lower inflation
: shifting AS to the right will cause lower price level.
Improved trade and balance of payments
: By making firms more competitive, they will be able to export more, improving current account on balance of payments.
Interventionist supply-side policies:
Improving transport and infrastructure:
In a free market, there is likely to be an under-provision of public transport. If the government spent money to improve transport network, firms would benefit from lower costs.
Improving geographical mobilities:
Shortage of housing in popular areas can cause geographical immobility.The government could try to build new houses or impose rent controls
Providing better information about jobs.
Rising minimum wage significantly to become a living wage
: A significantly higher minimum wage could encourage more people to enter the labour market and take a job.
Increased education and training:
Better education can improve labour productivity and increase AS. Often there is an under-provision of education in a free market, leading to market failure.
Market-oriented supply-side policies:
Privatisation:
This involves selling state-owned assists to the private sector. It is argued that the private sector is more efficient in running businesses because they have a profit motive to reduce costs and develop better services
Deregulation:
This involves reducing barriers to entry in order to make the market more competitive. greater competition creates incentives to reduce prices and costs.
Reducing taxes:
It is argued that lower taxes (income and corporation) increase incentives for people to work harder, leading to higher output.
Reducing state welfare benefits:
Lower unemployment benefits may create a bigger incentive for people to look for work and stay off benefits.
Labour market reforms:
Some economists argue that many european labour markets are too heavily regulated. For example removing laws about hiring and firing workers would increase labour market flexibility.
Immigration:
Allowing more immigration could help the economy become more flexible and deal with labour shortages, such as nurses and teachers
Raising income tex threshold:
Holding to encourage more people into work and reducing 'benefit trap' thus increasing the gap between work and state benefits.
Evaluation points:
Deregulation, such as lower benefits and reduced minimum wages may cause side-effects, such as increased poverty
Government failure may occur. the government may have poor information about what to spend money on and may fund the wrong scheme.
It will cost money to improve information and education, and therefore taxes will need to rise
In a recession, increasing AS may be insufficient. In a resection, policies to increase AD are more important than supply-side policies.
They will take time to have effect, creating a time lag.