The Effectiveness of Supply-Side Policies (DP IB Economics)

Demand-side Effects of Supply-side Policies

• Supply side policies aim to increase the long-run aggregate supply

• These policies often take years to complete, but once completed, they add extra productive potential to the economy

• Examples of these kinds of policies include building new roads, new airports, new ports, new hospitals, new schools, new hydroelectric dams etc.
   

• These types of supply-side policies require government spending on an annual basis for as long as it takes to complete the project

  • This government spending is a component of aggregate demand and helps to boost the national output in that year

  • E.g. to build a new port, the government has to hire a firm to complete the project, pay their workers, and pay for the materials (cement, sand, trucks, steel etc)

  • This government spending boosts aggregate demand in the short term
    

• It has been argued that the best government spending is that which boosts AD in the short term but increases LRAS in the long term

Supply-side Effects of Fiscal Policies

• Many fiscal policies have the ability to improve the productive potential (supply-side) of an economy

  • E.g. Education subsidies to help the poorest households constitute an annual expenditure for the government. However, in the long term they help to improve human capital which boosts productivity and output

  • The fiscal policy is short term (annually) however the supply-side impact occurs in the long term

An Evaluation of Supply-side Policy

• 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 Market Based Supply-side Policies

An Evaluation of Interventionist Supply-side Policies