Free Market Supply-side Policies
- Free market based supply-side policies aim to free up markets and improve market incentives so as to increase the long-run aggregate supply
An Explanation of Free Market Supply-side Policies
Market based policy |
Explanation |
Possible effects on the aims of supply-side policy |
To increase incentives |
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Taxes decrease → firms and individuals retain more money for themselves → incentives increase → productivity improves → long term growth increases |
To improve competition and efficiency |
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Regulation on firms decreases → the cost of production for firms falls → firms lower selling prices → international competitiveness improves State owned firms are privatised → more firms enter the market to compete → competition and efficiency improves |
To reduce labour costs and create labour market flexibility |
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Wages decrease → the cost of production for firms falls → firms lower selling prices → international competitiveness improves |
The possible impact of abolishing minimum wages
- A national minimum wage (NMW) is a legally imposed wage level that employers must pay their workers
- It is set above the market rate
- Removing it will allow wage levels to fall, thus reducing the costs of production for firms
Diagram: Abolition of a Minimum Wage
Removing the national minimum wage (NMW1) may cause wage rates to fall from W1 to We
Diagram analysis
- The demand for labour (DL) represents the demand for workers by firms
- The supply of labour (SL) represents the supply of labour by workers
- The national minimum wage and quantity for truck drivers in the UK is seen at W1Qd
- The UK government removes the national minimum wage (NMW) at W1
- Incentivized by lower wages, the demand for labour by firms increases from Qd → Qe
- Facing lower wages, the supply of labour by workers decreases from Qd → Qe
- The labour market is now in equilibrium at WeQe
- There is a lower wage rate and higher quantity of workers employed
Evaluating free market supply-side policies
- The benefits of supply-side policies far outweigh the negatives, yet many economies fail to fully develop their supply-side policies due to a process of constant political change and an associated change in government priorities
An Evaluation of Free Market Supply-side Policies
Advantages |
Disadvantages |
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