What are supply side policies?

Supply-side policies are those government policies which aim at

positively affecting the production side of an economy by improving
the institutional framework and the capacity to produce (that is, by
changing the quantity and/or quality of factors of production).
In short it involves all measures taken by the government for improving the
productive potential of the economy.
Supply-side policies may be market-based or interventionist and that in either
case they aim to shift the LRAS curve to the right, achieving growth in potential
output.

Market-based supply-side
policies
Policies to encourage competition
Competition leads to increased efficiency and eliminates market
failure. Government can adopt various strategies to reduce its
control over market and encourage competition. This includes

Deregulation: The reduction or elimination of government

power in a particular industry, usually enacted to create more
competition within the industry.

Privatization: The transfer of ownership of property or

businesses from a government to a privately owned entity. It leads
to greater efficiency as it is thought to come from the greater
importance private owners tend to place on profit maximization as
compared to government, which tends to be less concerned about
profits.

Trade liberalization: This involves the removal or reduction

of restrictions or barriers on the free exchange of goods between
nations. Trade liberalization ultimately lowers consumer costs,
increases efficiency and fosters economic growth.

Anti-monopoly regulations can avoid monopolies being

formed and thus stimulate competition among firms, leading to
greater efficiency.

Labour market reforms

These include reducing the power of labour unions, reducing
unemployment benefits and abolishing minimum wages in order to
make the labour market more flexible (more responsive to supply
and demand).

Incentive-related policies
Personal income tax cuts are used to increase the incentive to work,
and cuts in business tax and capital gains tax are used to increase
the incentive to invest.

Interventionist supply-side
policies
Investment in infrastructure
Improving information and investing in infrastructure will facilitate
the firms to produce more and at a more cost efficient manner.
Better infrastructure attracts more investment both domestic and
foreign. In the short run increase government expenditure on
infrastructure will lead to rise in AD and will fuel inflation, however
in the long run it will lead to greater efficiencies and output thus
shifting the LRAS to the right.

Investment in human capital

This involves investment in education and training which will raise
the levels of human capital. This will, in the short-term, impact on
aggregate demand as consumption of certain goods will increase,
but more importantly will increase LRAS as labour becomes more
skilled and efficient.

Industrial policies
Through various industrial policies focus the government encourage
firms to move to areas of high unemployment.
These measures might include subsidies or tax concessions for firms
which move, the provision of facilities and improved infrastructure in
the depressed area, the siting of government offices in the
depressed areas and the prevention of firms expanding in the
prosperous ones.
This will have a short-term impact on aggregate demand but, more
importantly, will increase LRAS.

Investment in new technology

These policies encourage research and development which will
enhance efficiency and output. It will have a short-term impact on
aggregate demand, but more importantly will result in new
technologies and will increase LRAS.

Evaluation of supply-side
policies
The strengths and weaknesses of
supply-side policies
Time lags: Supply side policies generally take time to
implement and show results in the long run. For example, improving
the quality of human capital, through education and training, is
unlikely to yield quick results.
These policies have an ability to create employment as more jobs
are created in various fields such as education, technology and
health care. Moreover, these jobs are long term and sustainable.
Supply side policies have the ability to reduce inflationary
pressure in the long term because of efficiency and productivity
gains in the product and labour markets.
Supply-side policy is very costly to implement and have
severe impact on the government budget. For example, the
provision of education and training is highly labour intensive and
extremely costly. The government has to carefully plan these
spending over a period of time. In the short run market oriented
supply side policies such as reducing in income and corporate taxes
can reduce governments main source of revenue, however in the
long run size of the economic growth would be significant enough
that the increased government revenue from a faster growing
economy would cause overall revenue to increase.
Effect on equity: Many supply-side measures have a negative
effect on the distribution of income, at least in the short-term. For
example, lower taxes rates, reduced union power, and privatisation
have all contributed to a widening of the gap between rich and poor.
Effect on the environment: Supply side policies lead to more
economic growth. However, it can lead to exploitation of natural
resources and environment if environmental regulations are relaxed
thus creating negative externalities of production.

Opposition: Power of labour unions, reducing unemployment

benefits and abolishing minimum wages can lead to wide spread
discontent among the labour force in the economy. Thus
governments are usually hesitant in taking these steps. Moreover,
these might also lead to worsening of working conditions in the long
run which will affect labour productivity.