⚡ What Are Supply-Side Policies?
Definition: Supply-side policies (SSPs).
Two broad approaches
- Market-based (free-market) SSPs — reduce government intervention and let market forces drive efficiency. Associated with neoclassical / new-classical economics.
- Interventionist SSPs — the government actively invests and intervenes to boost productivity. Associated with Keynesian thinking.
Both approaches shift LRAS right — the difference is how: markets doing it themselves vs the government stepping in.
🏪 Key Market-Based SSPs
- Deregulation.
- Privatisation.
- Trade liberalisation.
- Tax reform — lower corporate and income tax rates to incentivise work, entrepreneurship, and investment. May include reducing tax on capital/profits to boost I.
- Labour-market reform — reducing trade union power, lowering minimum wages, making hiring/firing easier → increases labour-market flexibility and reduces structural unemployment.
Real-world example: In the 1980s, the UK under Thatcher and the US under Reagan pursued aggressive market-based SSPs: privatising telecoms and airlines, deregulating finance, cutting top tax rates, and weakening union power. The approach boosted output but also widened inequality.
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⚖️ Evaluation of Market-Based SSPs
Strengths
- Can improve efficiency and lower costs through competition.
- Reduce government burden and fiscal pressure.
- Encourage entrepreneurship and innovation.
- May increase FDI (foreign direct investment) through a business-friendly environment.
Weaknesses
- Increased inequality — tax cuts often benefit high earners; weaker unions reduce worker bargaining power.
- Market failures persist — deregulation can lead to externalities (e.g. environmental damage from less regulation).
- Privatisation concerns — natural monopolies (water, rail) may exploit consumers without competition.
- No guarantee of investment — lower taxes don't automatically lead firms to invest more if demand is weak.
- Time lags — effects take years to materialise.