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Supply-side policies evaluation - Coggle Diagram
Supply-side policies evaluation
Market-based
Competition
Privatisation
Private firms are likely to sell at higher prices and produce lower quantities compared to the government - not in the public's interest + affects low-income individuals significantly.
There may be negative effects on the environment as profit-oriented firms are less concerned about sustainable resource use and avoidance of negative production externalities = pollution or environmental degradation.
Increased unemployment as private firms layoff workers due to cost saving, leading to worsening distribution of income.
Trade liberalisation
May have short-term losses for some stakeholders - less efficient firms shut down = :arrow_up: unemployment
Deregulation
:arrow_up: unemployment = worse distribution of income
May not always be in the public interest e.g. financial deregulation in the US lead to the financial crisis of 2008.
Labour market reforms
Lower social protection = increase in job insecurity = demotivation
Lower wages / income = increase in poverty + unequal distribution of income
Reducing the unemployment benefits = reducing an automatic stabiliser required to smooth out the business cycles abrupt peaks + troughs
Incentive-related
Income tax cuts may be ineffective = want for more leisure rather than desire to work more = substitute effect is higher than income effect
Cuts in taxes may lead to a larger budget deficit and public debt as the government receive less income thus, debt increases and there are more outflows than inflows.
Cuts in business taxes, capital gain taxes and taxes on interest income may worsen the distribution of income as most are paid by higher income earners rather than lower...
Interventionist
STRENGTHS
Provides direct support for areas essential for growth - R&D, infrastructure, human capital etc.
Creates new jobs and reduces structural unemployment
Results in econ growth and increase in Yf
Puts a downward pressure on inflation due to the increase in productive capacity - as an economy grows, if AD is matched with AS, there'll be little or no upward pressure on the PL.
Results in improved equity in distribution of income if I in human capital are broadly distributed, job opportunities will be available for all
WEAKNESSES
Time lag
The gov spending has opportunity costs and negative effects on the gov budget = may lead to a budget deficit increasing public debt
Gov spending increase may lead to an oversized / inefficient gov sector
Gov may make poor decisions on what industries to support = inefficiency in the allocation of resources.
Both
Time lags:
Both only come into action after significant time lags making it longer term policies. This is because activities set into motion (labour market reforms, increased competition...) need time to take effect and affect Yf. Interventionist policies affect AD in the short term thus, could be more useful than market-based in closing a recessionary gap - OR - could contribute to destabilising the economy by adding inflationary pressures.