🔄 Market-Based vs Interventionist
- Market-based: rely on competition and incentives. Faster to implement, lower government cost, but risk inequality and market failures.
- Interventionist: rely on government spending and planning. Address market failures and inequality, but expensive and slow.
- Most economies use a mix of both — the debate is about the balance.
The context matters
- Developing countries → may benefit more from interventionist SSPs (education, healthcare, infrastructure are lacking).
- Over-regulated economies → may benefit more from deregulation and liberalisation.
- Economies with high inequality → interventionist approaches address distributional issues.
- Economies in fiscal crisis → market-based SSPs are cheaper to implement.
In exams, the best answers consider both approaches and explain which is more appropriate for the specific context of the question. Avoid one-sided arguments.
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✏️ SSPs on AD/AS Diagrams
The key diagram
- SSPs shift LRAS to the right (from LRAS₁ to LRAS₂) — potential output increases.
- In the new classical model: the vertical LRAS shifts right → more output at a lower price level.
- In the Keynesian model: the horizontal/upward-sloping section of AS extends further right → economy can produce more before hitting full capacity.
Why SSPs are different from demand-side policies
- Demand-side (monetary + fiscal) shift AD → short-term boost but may cause inflation if economy is near capacity.
- SSPs shift LRAS → increase potential output → non-inflationary growth in the long run.
- SSPs address the root cause of many macro problems: low productivity and limited capacity.
SSPs shift LRAS right. They increase potential output and can lower the price level. They are the only way to achieve sustained, non-inflationary long-run growth.
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🎯 Overall Evaluation of SSPs
Common strengths (both types)
- Increase potential output → non-inflationary growth.
- Can reduce the natural rate of unemployment (NRU).
- Improve international competitiveness → help (X − M).
- Address long-run structural problems, not just short-run demand.
Common weaknesses (both types)
- Long time lags — years or decades to take full effect. Useless for short-run stabilisation.
- Uncertain outcomes — no guarantee the policy will work as intended.
- Don't fix short-run demand deficiency — a recession needs demand-side stimulus; SSPs alone won't fill a deflationary gap.
- Potential equity trade-offs — market-based SSPs may increase inequality.
A common exam mistake: saying SSPs can solve a recession. SSPs build long-run capacity — they don't boost AD in the short run. For a demand-deficient recession, you need fiscal or monetary policy.