Supply Side Policy

Supply Side Policies are government attempts to increase productivity and shift Aggregate Supply (AS) to the right.

How do supply side policies work?

Supply side policies aim to increase the long run aggregate supply. This can be done by increasing the quality or quantity of factors of production. Here are a few ways of achieving this - 

1) Increase in training & education - Education is under-provided by the market as it is a merit good. Therefore, governments increase the quality and quantity of training and education by either providing the education themselves or by subsidising companies.

2) Reduction in direct taxes (eg. income tax) - Lower taxes may provide workers with an incentive to work even harder.

3) Improvements in Infrastructure - Improving trasnport and roads will reduce costs of firms which means they invest that in increasing the quality and quantity of their supply.

4) Privatisation - It is argued that private sector firms are more efficient as they have different goals, than the state sector counter parts, which forces them to be more productive. 

5) Reducing the power of Trade Unions - This increases the efficiency of firms and reduce unemployment because trade unions force higher wages. 

6) Deregulation - This invlolves reducing legal barriers to entry (eg. laws) which increase competition as more firms are able to enter the market. Additionally, Monopoly power can be reduced by restricting anti-competitive behaviors.

Advantages of Supply side policices.

1) Lower Unemployment

2) Higher Economic Growth

3) Reduction in the rate of Inflation.

Disadvantages of Inflation.

1) Involves extremely high costs

2) Takes a lot of time to implement.

3) Depends on the initial level of economic activity.