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Chapter 13: Supply Side Policies - Coggle Diagram
Chapter 13: Supply Side Policies
Interventionist (government directly influences resource allocation)
nationalisation:
government takes ownership of running business (opp of privatisation)
regulation and legislation:
government directly controls price level/influences supply. directly affects COP and increases quantity of FOP
direct provision, infra development:
public facilities may be underprovided, (positive externalities). improving infra increases PC and attracts more investments
incentives:
grants, subsidies, tax benefits (e.g training, R&D, I) which increases productivity and PC (LRAS/SRAS)
providing guidelines and info:
to influence wage, price or production decisions. providing info to promote certain practices (may also improve efficiency of job search, decrease FU)
LIMITATIONS
bureaucracy and corruption:
gives rise to inefficiency due to absence of profit motive as govt.
wasting public funds
: desired effects may not always materialise, may have little impact
workability and compliance:
asks business leaders to abandon primary function of profit maximisation
allocative inefficiency:
prices must be able to fluctuate freely and fully
time as eval is only as last resort, use to say it works better in tandem w DD policy
Market-oriented (relying on market forces)
Pro-competition policy:
⬆️competition -> ⬆️ efficiency ->⬇️COP -> ⬆️SRAS -> ⬆️RNY and ⬆️GPL
pro-competition:
profit motive, ⬆️comp -> ⬆️ process innovation -> ⬆️ productive capacity -> ⬆️LRAS -> PEG
privatisation:
transfer of ownership from govt into private sector (reduce ineff as firms aim for profit max)
outsourcing:
contracting certain functions to private sector
deregulation:
removing artificial barriers in place to create contestable markets. (same as pro-comp)
free trade/capital movements:
reducing trade restrictions to allow more foreign competition
Manpower policy
:
Reducing trade union power
⬇️trade union power -> ⬇️wage rigidity, adjusts more freely -> ⬇️COP, ⬆️SRAS
reducing unemployment welfare benefits
⬆️number of workers -> ⬆️FOP, ⬆️ AS
reducing government intervention:
⬆️priv sector participation -> ⬆️ efficiency -> ⬇️COP, ⬆️investment, ⬆️AS
tax cuts:
⬆️incentive to work and invest -> ⬆️quantity of FOP and PC through investment -> ⬆️AS
LIMITATION
tax cuts may not necessarily make people work harder (no income effect)
unfavourable business climate, cannot take risks
social rate of return of monopolistic corps > private RoR
companies may not invest much into training -> workers may quit and move to rival firms
effects of SSP (achieves macro aims)
promotes EG:
reduces structural rigidity, improves market efficiency, reduce COP -> increases AD, increases potential growth by work force
reduces unemployment:
⬇️COP, firms now more willing and able to produce, productive capacity increases, more FOP employed. SSP may also reduce structural U like skills training
controls inflation:
downwards shift in AS due to national wage guidelines and cost-control measures/subsidies
promoting favourable balance of trade: (RECOMMENDED)
controlling inflation, encouraged innovation, improved productivity, X more price competitive. can also improve in quality (QQT)