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CH14: AS policy - Coggle Diagram
CH14: AS policy
market-oriented AS policies
- reduce gov intervention
- reduce structural rigidities
- putting more reliance on market forces and competitions
pro-competition policy
- reducing monopoly or market power of business helps to reduce the stickiness of prices, allowing pice to adjust downwards, hence stimulate demand and increase employment
- more competition, less the ability of monopoly to raise the price
- reduce cost-push factor
- COP reduce, structural rigidities removed, SRAS increase, increase in national output, decrease in price
pro-competition or anti-monopoly legislation
- prohibit agreements or practices which restrict competition and attempt to control the market e.g. forming cartels, price fixing
e.g. Anti-thrust law
privatization
- transfer ownership of companies from the public sector to private shareholders
- reduce inefficiency due to govt bureaucracy
- more consumer choice and lower prices
Corporatistation
- converting govt agency providing certain goods and services into a company that is run on a profit-making and commercial-oriented basis
- the company is still wholly owned by the gov
- subject to market competition, promote efficiency
deregulation
- removal of monody right in a particular industry
outsourcing
- Gov contracting certain of its function to the pirate sector through competitive bidding process
free trade and free capital movement
- remove or reduce trade restrictions to allow more foreign competition
- removal of tariffs promotes competition and improve efficiency of local producers and reducing price rigidities
- free flows allows capital in and out, helps to facilitate foreign investment and promote competition
manpower policy
Reducing the power of trade unions
- prevent cost-push inflation
- allow employees to joint any union
- action against other unionized companies are made illegal
- lawful industrial action would be confined only to workers on direct employers
- reduce power, reduce structural rigidities, allowing wage to adjust more freely, COP fall, SRAS increase
- improving market efficiency, promote economic growth and employment
- increase pofiitiability of firms may attract more investment - both actual and potential growth
reducing unemployment welfare benefits
- discouraging ppl to stay unemployed
- reduce unemployment
reducing government intervention
- reduce the size of public sector hence allow for more participation of the free market
- reduce bureaucracy, improve efficiency in utilization of resources
- reducing gov expenditure and size of gov, more resources can be directed to private sector, incraese in private sector investment
- increase productive capacity
tax cut
- provide greater incentive for ppl to work and work harder
- increase productive capacity
- shifting LRAS right wards
(Substitution effect outweigh the income effect )
- also stimulate investment by increasing profitability
Limitations
- in relativity, it is uncertain if tax cut can make ppl work harder
- tax cuts could lead to debt burden
- monopoly is required to retain the economies of scale
- more competition may lead to more inefficiency, as no economies of scale, higher cost
- private enterprise may not invest much in training for workers as investment in these workers will be lost when the workers leave
- privatization can also be detrimental to pblic interest as they will exploit public for profit
interventionist AS policies
- gov intervention
- increase research and investment, development, traning which are lack in private sector
Provision of guidelines and information
- provide guidelines or information to influence wages, price, production decisions
- promote certain practices or behaviors that could improve efficiency and increase AS
- educational information, management practices
- reduce fractional unemployment
regulation, legislation
- control level of prices and influence the supply of factors of production
- e.g. legal working age and retirement age
- birth control legislation
- foreign luo policies
- regulations on companies and business
incentives
- grants, subsidies and tax incentives
- e.g. grants in research and development, subsidies cost of traning workers
- purpose: increase population, and long run labor supply, encourage workers to enter workforce, encourage research and innovation, encourage foreign investment
urban policy and infrastructure development
- infrastructures such as roads and bridge, public facilities such as hospital and schools are built by gov
- increase productive capacity directly + attract investment to increase productive capacity
Limitations
- bureaucracy and corruption
- inefficiency, absence of profit motive, over regulation, responsiveness, stagnation, loss of competitiveness
- gov failure may set in as gov officials may abuse authority in administering certain regulations for their personal gain
- wastes of public fund
- incentives such as subsidy may not be effective, resulting in waste
- e.g. training do not really improve the skill & grants for companies will be lost if the companies eventually fail or become uncompetitive
- workability and compliance
- guild lines may not be followed due to profit maximization aim. Little voluntary cooperation can be expected
- allocative inefficiency and rationing **
- price control will inhibit the free floating of price and cannot make adjustment e.g. when the demand increase
- to decide how to allocate the resources can be arbitrary and inefficient
Effect
reducing unemployment
- reduce structural rigidities, allowing price and wages to adjust freely
- shifting SRAS downwards, hence increase in employment and output
- in addition, training reduce structural unemployment and gulidlines reduce frictional unemployment, more efficient labor
controlling inflation
- reducing the power of trade union reduce the wage-price spiral
- removal of reduction of structural rigidities by the gov cause SRAS to shift donward and help to reduce the general price level, keeping cost push inflation in check
- guild lines and subsidies reduce the COP, downward shift of SRAS hence reducing inflation
balanece of payment equilibrium
- controlling inflation, encouraging innovation and improving productivity, the export are now more competitive.
- improving the current account balance BOT
- incentives to attract FDI also improving the overall BOP
economic growth
- increase in real output, hence actual growth as AS cove shift
- incentive for investment - increase investment and improve productivity - shifting the LRAS curve and incaresing potential growth
in singapore context
Market-oriented policies
Pro-competition policy
- (a) competition act
- (b) privatization and corporatisation
e.g. DBS - taken over by private sector
- (c) outsourcing
competitive tax regime
- keep tax rates competitive.
- attract FDI
- based on supply side effect effect instead of stimulating AD
manpwer policy
- tripartism
- govt, unions and employers
- regulate the act of trade union, reduce structural rigidities and shifting SRAS
Interventionist policies
Labor force policies
- income policies (shifting SRAS)
- advise wage cut to reduce COP
- ensure cost competitiveness and prevent job loss
foreign manpower
- manage the number of foreigners by licensing requirement (e.g. work permits )
- hire cheaper worker, COP reduced
- labor force expand in size, long term increase in productive capacity
promoting population growth
- fertility rate
- child credits scheme
CET continuing education and training
- skillsfutrue
- high skills gained
- help individuals make well-informed choice in education
- training
- greater proficiency, knowledge, proficiency, expertise
- increase productive capacity and productivity
- decrease unemployment
Land utilization policies
- land reclamation
- expand productive capacity
- land use and uban planning
investment policies
- promoting FDI
- pomoting R&D
- e.g. astar, cutting-edge research, increase productive capacity and efficiency
- public investment and infrastructure development
- aim to shift the AS curve in the short run or long run or both, through reducing structural rigidities and production costs and / or increasing producicve capacity of the economy and hence influencing economic activity
- SRAC curve - various rigidities and market imperfections exist which may prevent prices and wages form adjusting freely, prices are sticky
- e.g. wage contract, monopoly power
- upward shift is the fall in SRAS
- LRAC curve - determined by the quantity and productivity of factors of productions (land, labor, capital), and state of technology
- assume in long run, all factors are flexible and will adjust fully to change of AD.
- represent the potential GDP (maximum output level )
- supply side policy can shift SRAS downward - reduce the COP or remove rigidities e.g. promote competition and reduce the power of trade union
- any change in quantity and productivity of factor inputs will cause a shift in the LRAS. (Usually SRAS change as well)
- increase of efficiency - more goods and services can be produced under the same resources
Shifting of the curve
increase in both LRAS and SRAS
- involves change in structural rigidities
increase in LRAS and SRAS
- increasing productive capacity also reduce COP
- but no change in structural rigidities
Increase in SRAS only
- only reduce the COP and structural rigidities
-