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Supply-side policies (The types of supply-side policies (Reducing the…
Supply-side policies
The types of supply-side policies
Privatisation
The transfer of assets from the public sector to the private sector i.e. the government may sell off businesses or industries to the private sector (oil, water, gas supply, etc.). There will be efficiency gains and a rise in productivity if backed by measures to promote competition.
Policies to encourage competition in product markets
E.g. Competition policy (government policy which increases competition). This could include reducing monopoly power. Monopoly power gives supply side disadvantages so the government can prohibit mergers and force monopolies to sell off some of their operation.
Development of infrastructure
Good infrastructure help an economy greatly, for example, transport is used for the movement of goods and help workers and consumers can travel to work and access markets.
Reducing the power of trade unions
Trade unions reduce supply by going on strike if not given higher wages.
By reducing trade union power, strikes are reduced, reducing amount of potential supply being lost.
Reducing direct taxes on workers
If direct tax on workers is reduced, it will increase the incentives to work and invest, which will push workers to increase production, leading to an increase in supply.
Education and training
Education and training can affect the quality of labour.
The better educated and trained the workforce, the more they're able to produce and the more supply in the economy.
Reducing benefits
If the income of the person is not much more than the benefits given, there is little incentive to work.
A generous level of benefits will act as a disincentive so reducing benefits will reduce the effect of that disincentive.
Reducing direct taxes on firms
If direct taxes for firms are reduced, they too will have a better incentive to invest, allowing them to expand and increase their supply.
What are supply-side policies?
Both fiscal and monetary policies focus on the aggregate demand of the economy.
Supply-side policies, on the other hand, focus on aggregate supply of the economy.
If demand rises but firms can't keep up, then GDP won't rise and price levels will. This will result in demand-pull inflation. This is when supply-side policies come into play. They are used to increase firms' productivity and the overall economic productive potential. This will result in more output, which will increase GDP without inflation as a problem.