Chapter 4.5.1-4.5.3 (Supply-side policy)
Definition
Supply-side policy aim to make markets and industries operate more efficiently in order to expand the productive potential of an economy and increase its total output.
Expand total output/supply -> Reduce price and rate of inflation/ Provide job opportunities/ Boost volume of exported good
Over the long run, it can help to achieve all the macroeconomic aims of a government at the same time
Supply-side policy instrument
Selective tax incentives
Reducing income/payroll taxes which motivate workers
Reducing tax on profit to encourage more entrepreneurs to start own business
Reduce taxes on the profits of the companies that R&D of new products and invest in advance capital good
Selective subsidies
Non-repayable sum of money given to help meets organization's cost and increase profit
Used to support: New, small businesses/ farm/ skill-training
Improving education and training
Firms will have access to skilled workers to run efficiently, conduct R&D and compete in international market
Well educated and trained workforce will improve productivity and more adapted to new technologies and production method
Labour market reforms
Powerful trade union will restrict supply of labour which force employment more costly and production less profitable. This will also increase unemployment and total output will be lowered. Laws & regulation will restrict the power of trade union
Too generous welfare to unemployed will discourage people from working. Government will reduce the benefits and seek for evidence from the unemployed that he is actively seeking for employment.
Large firms may pay lower skilled workers very low wages which would force them into unemployment. Government will set minimum wage laws to guarantee those worker will get reasonable wages.
Competition policy
Competition between firms for sales will force them to keep their costs and price low and improve their products. Monopolies would restrict competition and earn excessive profit. Government will fine firms that are anticompetitive and control their prices or even break them into smaller firms
Removing trade barriers
Tariff will protect domestic good from competition from imported goods. However, this may encourage the domestic firm to put less effort in reducing cost and improving product. Therefore, removing barriers to trade allow more international trade and benefit both consumer and producer.
Privatization
Transferring of public sector to private firms. This will allow them to provide more efficiently since they will aim to maximize profits. When private firm can provide cheaper and better than public sector, the consumer will benefit and taxes will be lowered.
Regulation & deregulation
Regulation
Deregulation
Rules that restrict certain activities which are aimed at correcting market failures.
Examples:
Protect consumer from misleading advertisement, harmful product and etc.
Protect key industries and business from unfair competition
Protect the environment to limit climate change
Removal of rules which can be a burdens on business as economies change and develop
Examples:
Remove restriction on shop opening hours
Reducing unnecessary labelling requirement on product