Supply side policies

Goals of Supply Side Policy

Increase Increase Labour

Improve
Productive Market
Efficiency
Capacity Flexibility

Investment in
International
Research and
Competitiveness
Development
 Supply Side Policies
Supply-side policies focus on the production and supply side of the economy, and
specifically on factors aimed at shifting the long-run aggregate supply (LRAS) or
Keynesian AS curves to the right, to increase potential output and achieve long-
term economic growth

Quantity Quality of Technological Institutional Increase in Reduction

of FOP FOP Changes changes Efficiency in NRU

No
Stabilizati
on role
 Supply Side Policies

Interventionist Supply
Market Based Policies
side policies

Market-based policies emphasise the importance of well-functioning competitive

markets in achieving growth in potential output, and are usually favoured by
monetarist/new classical economists.

Interventionist supply-side policies presuppose that the free market economy

cannot by itself achieve the desired results in terms of increasing potential output,
and argue that government intervention in specific areas is required.
 Supply Side Policies: Market based
Encouraging Labour Market Incentive Related
Competition Reforms Policies

Economic and
Social Regulation

Contracting
Privatization Deregulation out to the
private Sector

Anti
Trade
Monopoly
Liberalization
Regulation
Market-based policies emphasise the importance of well-functioning competitive
markets in achieving growth in potential output, and are usually favoured by
monetarist/new classical economists.
 Supply Side Policies: Market based
Labour Market
Reforms

Weaken the
Abolish
power of trade
Minimum wages
Union

Reducing
Reducing Job
Unemployment
security
Benefits

Market-based policies emphasise the importance of well-functioning competitive

markets in achieving growth in potential output, and are usually favoured by
monetarist/new classical economists.
 Supply Side Policies: Market based
Incentive Related
Policies

Lowering taxes
Lowering
on Capital Gains Lowering
Personal
& interest Business Taxes
Income Taxes
Income

Market-based policies emphasise the importance of well-functioning competitive

markets in achieving growth in potential output, and are usually favoured by
monetarist/new classical economists.
 Supply Side Policies: Interventionist
Interventionist supply-side policies presuppose that the free market economy
cannot by itself achieve the desired results in terms of increasing potential output,
and argue that government intervention in specific areas is required.

Interventionist Investment in human K

supply side policies
Training and Education How do these policies relate to
Improved Healthcare services fiscal policies that contribute to
long term growth of potential
GDP?
Investment in new technology
R&D leading to new or improved physical K
Incentives to private sector to engage in R&D – tax incentives

Investment in infrastructure
Investments in Power, telecommunication, roads, dams etc
human K,
physical K, or
infrastructure
leads to increase Industrial policies
in AD in SR and Support for SMEs
increase in Yp over Support for infant industries
LR
 Evaluation of Market Based Supply Side Policy
Weaknesses
• Time Lags
• Increase in unemployment in the SR?
• Negative effects on Equity?
• Might Effect Govt budget negatively
• Impact on Environment – deregulation/privatization
• Interference of vested interests
• Effectiveness of incentive related policies?
• Labour market reforms (Minimum wages)

Strengths
• Allocative Efficiency
• May not impact on Govt budget
• Reduces NRU
• Reduces inflationary pressure
 Evaluation of Interventionist Supply Side Policy
Weaknesses
• Time Lags
• Negative impact on Govt budget
• Political pressure leading to less
efficient outcomes
• Unintended outcomes of Govt actions

Strengths
• Ability to target specific sectors
• Create jobs
• Reduce inflationary pressure
• Positive effects on Equity