According to Sloman (2000) ‘‘ Supply Side economics is the branch of economics that considers how to improve the productive capacity of the economy. It tends to be associated with Monetarist, free market economics’’[i] . These economists tend to emphasise the benefits of making markets, such as labor markets more flexible. However, some supply side policies can involve government intervention to overcome market failure. Supply Side Policies are government attempts to increase productivity.
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Benefits of Supply Side Policies2:
1. Lower Inflation: By making the economy more efficient supply side policies will help reduce cost push inflation.
2. Lower Unemployment: Supply side policies can help reduce structural, frictional and real wage unemployment and therefore help reduce the natural rate of unemployment.
3. Improved economic growth: Supply side policies will increase the sustainable rate of economic growth.
4. Improved trade and Balance of Payments: By making firms more productive and competitive they will be able to export more.
Supply Side Policies
Most supply side policies aim to enable the free market to work more efficiently by reducing interference. (Sutcliffe& Sloman, 2004, P632)[ii] 3
1. Privatisation: This involves selling state owned assets to the private sector.
[iii] Sloman, J. (2000) Economics, Essex: Pearson Education Ltd. 2Pettinger, T (2008) Online Supply side Economics in the UK,
http://www. economicshelp. org/blog/economics/supply-side-economics-in-the-uk/, Date accessed 24th May 2010 2. Deregulation: This involves reducing barriers to entry in order to make the market more competitive. For example BT used to be a Monopoly but now telecommunications is quite competitive. Competition tends to lead to lower prices and better quality of goods.
3. Reducing Income Taxes: It is argued that lower taxes (income and corporation) increase the incentives for people to work harder, leading to more output.
4. Increased education and training: Better education can improve labor productivity.
5. Reducing the power of Trades Unions: This should
a) Increase efficiency of firms e. g. less time lost to strikes b) reduce unemployment (if labor markets are competitive)
6. Reducing State Welfare Benefits: This may encourage unemployed to take jobs.
7. Providing better information: about jobs this may also help reduce frictional unemployment.
8. Deregulate financial markets: to allow more competition and lower borrowing costs for consumers and firms.
9. Lower Tariff barriers: this will increase trade.
10. Improving Transport and infrastructure: Due to market failure this is likely to need intervention to improve transport and reduce congestion. This will help reduce firm’s costs.
11. Deregulate Labour Markets: This is said to be an important objective for the EU to increase competitiveness.