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Supply-side policy - Coggle Diagram
Supply-side policy
Role
They aim at positively affecting the production aspects of an economy by improving and thus, changing the quantity or quality of factors of production = shift the LRAD curve right - increase potential output
These can either be market-based or interventionist however both aim at shifting the LRAS to the right - achieve economic growth
Factors that lead to a rightward shift of the LRAS :
- increase in the quantity of FOP's
- Improvements in quality of FOP's
- Increase in efficiency - better use of scarce resources
- Reduction in the NRU - less labour
- Technological changes - improve the quality of the goods
- Institutional changes - anything that allows firms' output to increase ( lower costs, fewer regulations in the private sector...)
Market-based
Policies to encourage competition: Greater competition = cost reduction, greater efficiency, improving allocation of resources. This amount to using all resources to the optimum = Yf increases
Deregulation: Reduction of gov regulation of private sector activities'. as gov regulation increases inefficiency and reduces competition.
Private financing of public sector projects: Historically the gov built public sector projects (schools, hospitals etc.). Nowadays, private financing initiatives have emerged - private firm builds finances and operates public services. The capital and services are owned by the private company and the gov buys the services: :arrow_up: competition as firms compete to be selected by the gov (at lowest cost + best quality)
Privatisation: 'Transfer ownership from the public to private sector'. Increases efficiency as improved management + operations of the firm. Based on ideal that gov enterprises are inefficient due to bureaucracy, unproductive workers, high administrative costs etc. as they don't face incentives to lower costs and maximise profits.
Contracting out to the private sector (outsourcing): Public services provided by private firms based on contracts with the gov. :arrow_up: competition as private firms compete with each other = lower costs of production, improved efficiency + quality.
Restricting monopoly power: :arrow_up: from anti-monopoly measures/laws = prevents mergers that will be monopolistic, breaking up firms behaving monopolistically. More for forces of S and D = lower costs of production, improved quality + efficiency
Trade liberalisation: When international trade is less restricted. Free / freer trade increases competition domestically + globally = greater efficiency + allocation of resources.
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Emphasise the importance of well-functioning competitive markets in achieving growth in potential output - favoured by neo-classical
Interventionist
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Investment in new tech
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Gov invest a lot of money into R & D - provide incentives to private sector firms to engage in it (tax incentives)....
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Industrial policies
Support for small and middle sized enterprises: May take the form of tax exemptions, grant, low interest loan or business guidance. Provides support for the private sector (promote efficiency, employment possibilities...) and increases AD + Yf
Support for infant industries: Newly emerging industries in developing countries are provided, grants, subsidies, tax exemptions, tariffs ... .Provides support for the growth of the private sector and increases AD + Yf
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Rely on gov intervention to achieve growth in potential output - favoured by Keynesian
- Presupposes the free market cannot on its own achieve potential output and gov intervention is required
In general, interventionist supply-side policies have a short-term impact on AD and shift Yf in the long term (the KAS)