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    Unit 12 - Lesson 9 7 Supply-Side Policies

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    Supply-side policies aim to increase the potential output of the economy by improving factors of production. There are two types: interventionist policies like investing in human capital, technology, and infrastructure; and market-based policies such as encouraging competition, labor market reforms, and incentive policies. Both types of supply-side policies seek to shift the LRAS curve to the right by boosting productivity and supply potential.

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    Unit 12 - Lesson 9 7 Supply-Side Policies

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    Supply-side policies aim to increase the potential output of the economy by improving factors of production. There are two types: interventionist policies like investing in human capital, technology, and infrastructure; and market-based policies such as encouraging competition, labor market reforms, and incentive policies. Both types of supply-side policies seek to shift the LRAS curve to the right by boosting productivity and supply potential.

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    Supply-side policies aim to increase the potential output of the economy by improving factors of production. There are two types: interventionist policies like investing in human capital, technology, and infrastructure; and market-based policies such as encouraging competition, labor market reforms, and incentive policies. Both types of supply-side policies seek to shift the LRAS curve to the right by boosting productivity and supply potential.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4K views14 pages

    Unit 12 - Lesson 9 7 Supply-Side Policies

    Uploaded by

    api-260512563
    Supply-side policies aim to increase the potential output of the economy by improving factors of production. There are two types: interventionist policies like investing in human capital, technology, and infrastructure; and market-based policies such as encouraging competition, labor market reforms, and incentive policies. Both types of supply-side policies seek to shift the LRAS curve to the right by boosting productivity and supply potential.

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    of 14

    Supply-side Policies

    Unit 12 - Lesson 9.7

    Learning outcomes:

    Explain that supply-side policies aim at positively affecting the production side
    of an economy by improving the institutional framework and the capacity to
    produce by changing or improving the quality or quantity of the factors of
    production.
    State that supply-side policies may be market based or interventionist and
    either cases aim is to shift the LRAS to the right achieving potential growth.
    Explain how the Interventionist view of investment in human capital,
    technology, infrastructure and industrial policies by governments increase the
    potential output of the economy.
    Explain how the Market-based view of encouraging competition, labor market
    reforms and incentive related policies aim to increase the potential output of
    the economy.

    Supply-side Policies

    Focus of these policies is on the Supply side of the economy.

    Goal is to increase in the factors that influence the LRAS increasing the potential
    output of the economy.

    The aim of these policies is not to stabilize the economy or reduce the intensity
    of the business cycle.

    Supply-side policies focus on improving the quantity and the quality of the
    factors of production as well as institutional changes that aim to improve
    the productive capacity of the market.

    Interventionist & Market based Policies


    There are two distinct categories of Supply-side policies:

    Interventionist:

    Policies that rely on Government intervention to achieve growth and in


    potential output.
    Usually favored by Keynesian economic thinkers.

    Market Based:

    Emphasize the importance of well functioning competitive markets that are


    free from Government intervention.
    Usually favored by New Classical/Monetarist economic thinkers.

    Interventionist Supply-side Policies


    1. Investment in Human Capital
    Training & Education
    Improved Health Care Services
    2. Investment in New Technology
    3. Investment in Infrastructure
    4. Industrial Policies

    Interventionist - Human Capital


    Training & Education: Investment from the government in training
    programs and in public education can help individuals to become more
    employable thus reducing the NRU.
    Examples:
    Retraining programs for the unemployed.
    Grants & low interest loans
    Subsidies to firms that relocate to areas where there is greater
    demand for labor.

    Human Capital
    Improved Health Care Services & Access:
    With greater access to better and health care services,
    people become healthier and more productive thus
    increasing the Potential Output of the economy.

    Health Care is a positive externality and thus some justify


    government intervention to correct.

    Interventionist - New Technology


    Research & Development of New Technologies
    Results in improved capital goods and leads to increase in Potential Output.
    Governments intervene by:
    1. Tax incentives
    2. Patents for protecting inventions
    Increases AD in the short-run and will lead to increase in Potential Output
    (shift in LRAS) over the long-run.

    Interventionist - Infrastructure
    Infrastructure is a type of physical capital
    Examples include: Roads, dams, airports, urban transport
    Infrastructure can qualify as a merit good therefore justifies government
    intervention.

    Good roads and railway facilitate efficient transport of goods and


    people therefore increasing the potential output of the economy.

    Interventionist - Industrial Policies


    Government policies that aim to support the Industrial sector of the economy.
    Support of Medium sized firms in the form of
    1. Tax exemptions
    2. Grants
    3. Low interest loans.
    Support for Infant Industries - especially in developing countries
    Promotes efficiency, capital growth, increased employment increasing AD and
    increasing the Potential Output

    Market-based Supply-side Policies


    Market-based policies can be grouped into three distinct
    categories:
    1. Encouraging competition
    2. Labor Market Reforms
    3. Incentive-related policies

    Market-based: Encouraging Competition


    Greater competition among firms forces them to be more efficient and lower costs.
    This allows resources that were unproductively used by firms to be put to use elsewhere
    thus increasing the Potential Output of the economy.
    Examples:
    1.
    2.
    3.
    4.
    5.
    6.

    Privatisation: transfer of ownership from the public to private sector.


    Deregulation
    Private financing of Public projects
    Contracting out to the Private sector
    Restricting Monopoly power
    Trade liberalization

    Market-based: Labor Market Reforms


    Goal is to increase Labor Market Flexibility so the Labor market can respond
    more to the market forces of Supply & Demand.
    Examples:
    1.
    2.
    3.
    4.

    Abolishing Minimum Wage


    Weakening Trade Unions
    Reducing Unemployment Benefits
    Reducing Job Security

    Market-based: Incentive-related Policies


    Involve cutting various types of taxes thus freeing up more money for firms
    and changing the incentive of consumers and firms.
    Examples:
    1. Lowering personal income taxes
    2. Lowering taxes on Capital Gains and Interest Income
    3. Lowering Business Taxes

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