Summary of supply side policies, examples benefits and issues associated with implementing them
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Course
Unit 7 - Macroeconomic policies
Institution
CIE
A summary for a level students of all exam boards. Covering supply side policies both interventionist and free market supply side policies. Resources used apply to all exam boards
Supply-side policies
Supply-side policies aim to improve the long-run productive potential of the economy
Free market supply side policies
Involve policies to increase competitiveness and free-market efficiency. For example,
privatisation, deregulation, lower income tax rates, and reduced power of trade unions.
Interventionist supply-side policies involve government intervention to overcome market
failure. For example, higher government spending on transport, education and
communication.
Benefits of supply side policies
Lower inflation
Shifting AS to the right will cause a lower price level. By making the economy more
efficient, supply-side policies will help reduce cost-push inflation. For example, if
privatisation leads to more efficiency it can lead to lower prices.
Reduce unemployment
Supply-side policies can contribute to reducing structural, frictional and real wage
unemployment and therefore help reduce the natural rate of unemployment.
Improved economic growth
Supply-side policies will increase the sustainable rate of economic growth by increasing
LRAS; this enables a higher rate of economic growth without causing inflation
Improved trade and balance of payments
By making firms more productive and competitive, they will be able to export more. This is
important in light of the increased competition from an increasingly globalised marketplace
Interventionalist policies
Training and education
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.
Improved transport and infrastructure
With transport, there is usually a degree of market failure – congestion and pollution.
Government spending on improved transport links can help reduce congestion and
overcome this market failure. Improved transport provision helps reduce the cost of
transport and will encourage firms to invest. Transport bottlenecks on the road, rail and air
– are often cited as a major stumbling block for the UK economy.
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