In the previous lessons, we learned about fiscal and monetary policies. We also learned about the problems of those policies. Now, let us look at supply side policies.
Most supply side policies aim to enable the free market to work more efficiently and attempt to promote employment, low inflation and economic growth. The main idea behind Supply side policies is to reduce Government interference.
We have to understand that, if the government increases demand by using demand-side policies(fiscal and monetary policy) to boost the economy, it could lead to inflation if the supply does not increase proportionately. Therefore, a real good solution to this will be to try to increase supply. Supply side policies include:
- Reducing the tax burden – When taxes are reduced, it encourages firms to increase production. When the cost of production is reduced, it will in turn lead to lower prices. This helps the economy.
- Privatisation – Privatisation is the selling of state owned businesses to private individuals and groups. This increases the efficiency of these organisations as they face more competition. Profit motive increases the incentive to utilise the resources in the best possible way.
- Deregulation – Deregulation involves reducing barriers to entry in order to make the market more competitive. It does away with unnecessary rules and regulations on business which results in reduced cost, increased output and lower prices. Moreover, it increases the competition in the economy, leading to higher efficiency for businesses.
- Increased education and training – Improving the level of education, training and skills of the workforce will raise the labour productivity and increase the aggregate supply. Governments usually give a lot of importance to education and encourage more and more people to attend universities and colleges and enhance the skills of the workforce.
- Labour Markets reforms – By controlling the actions of the trade unions the Government can ensure that there is least disruption in the business activities.
Next topic: Possible conflicts between government aims