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Supply-side policy - Coggle Diagram
Supply-side policy
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Deregulation - this involves reducing barriers to entry to allow new firms to enter the market. This will make the market more competitive. Competition tends to lead to lower prices and better quality of goods/service
The difficulty is that not all industries are amenable to competition, such as natural monopolies. Privatising and deregulating these industries tends to create a private monopoly who can charge higher prices
Reducing income tax rates - it is argued that lower income tax rates increase the incentives for people to work harder, leading to an increase in labour supply and more output. Similarly, a cut in corporation tax gives firms more retained profit they can use for investment
However this is not necessarily true, lower taxes do not always increase work incentives (if income effect outweighs substitution effect). Firms may not invest the increased profit but give to shareholders or save
Deregulate labour markets - labour markets can be deregulated through policies; make it easier to hire and fire workers, abolish redundancy pay or right of appeal, reduce maximum working weeks and minimum holiday pay, enable zero-hour contracts which allow firms to employ workers when demand is greater
However, more flexible labour markets can cause increased uncertainty and lower productivity
Supply-side policies are government attempts to increase productivity and efficiency of the factors of production (quantity and quality). If successful, they will shirt the LRAS to the right snd enable an increased productive potential of the economy. They will shift the PPF outwards.
Privatisation - this involves selling state-owned assets 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
Reducing the power of trades unions - this can involve legislation which reduces the ability of trade unions to go on strike, should increase efficiency of firms and reduce real wage unemployment
Reducing unemployment benefits - lower benefits may encourage the unemployed to take jobs. Lower means-tested benefits for those in work may increase the incentive to work longer hours
Deregulate financial markets - deregulation should allow more competition and, in theory, lead to lower borrowing costs for consumers and firms
Increase free-trade - lower tariff barriers will increase trade and provide an incentive for export firms to invest. Increasingly important are non-tariff barriers. Negotiating frictionless trade-deals can lead to lower cost for business and improve productivity
Removing unnecessary red tape - planning restrictions can make it difficult for firms to expand and invest in new capacity. Reducing red tape and levels of bureaucracy reduce firms’ costs and encourage an environment conducive to encouraging investment
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Increased education and training - better education can improve labour productivity and increase AS. Often there is under-provision of education in a free market, leading to market failure. Therefore the government may need to subsidise suitable education and training schemes to fill vacancies in the labour market. However govt intervention will cost money and require higher taxes, It will take time to have an effect and the government may subsidise the wrong types of training
Improving transport and infrastructure - government spending on improved transport links can help reduce congestion and overcome market failure. Improved transport provision helps reduce the cost of transport and will encourage firms to invest. However, in a crowded country like the UK, it can be difficult to increase transport capacity
Build more affordable homes - building affordable council homes in expensive areas can make it easier for workers to move and find jobs in expensive areas reducing geographical immobility. Firms can suffer from labour shortages in areas that have become very expensive to live in
Improved healthcare - health care spending which improves a nation’s health can improve labour productivity. Improved health can also come from discouraging unhealthy habits