Study Notes

Supply-Side Economics - Product Market Reforms

Level:
AS, A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Product markets refer to markets in which all kinds of goods and services are made and traded, for example the market for airline travel; smart-phones, new cars; pharmaceutical products and the markets for financial services such as banking, mortgages and pensions.

Supply-side policies in product markets are designed to increase competition and efficiency

Privatisation

  • Over the last 30 years, many former state-owned businesses have been privatised – i.e. transferred from the public to private sector.
  • Examples in Britain include British Gas, British Telecom, British Airways, British Steel, British Aerospace, the regional water companies, electricity generators and distributors, and the railways.
  • The Royal Mail was part privatised in 2013.
  • Privatization is designed to break-up state monopolies and create more competition. The government also created utility regulators such as OFCOM and OFWAT who have in the past imposed price controls and who are now in charge of over-seeing moves towards competitive markets in areas such as gas and electricity supply and telecommunications.

Deregulation of Markets

  • De-regulation or liberalisation means the opening up of markets to greater competition
  • The aim of this is to increase market supply (driving prices down) and widen the choice available to consumers
  • Good examples of deregulation to use include: urban bus transport, post and parcel delivery service, telecommunications, and gas and electricity supply.

Toughening up of Competition Policy

  • Most supply-side economists believe that competition forces business to become more efficient in the way in which they use scarce resources.
  • A tougher competition policy regime includes policies designed to curb anti-competitive practices such as price-fixing cartels and other abuses of a dominant market position – in other words – intervention to curb some of the market failure that can come from monopoly power

A commitment to free (open) trade

  • Trade between nations creates competition and should be a catalyst for improvements in costs and lower prices for consumers
  • The UK is committed to an expansion of free trade within the European Union Single Market and also negotiating a liberalisation of trade in the global economy as part of its membership of the World Trade Organisation.

Measures to encourage small business start-ups / entrepreneurship

  • The small businesses of today often become the larger businesses of tomorrow employing more workers and contributing to innovation that can have positive spill-over effects in other industries.
  • Governments of all political persuasions argue that they want to promote an entrepreneurial culture and to increase the rate of new business start-ups.
  • Supply side policies include loan guarantees for new businesses; regional policy assistance for entrepreneurs in depressed areas of the country; advice for new firms
IMF calls for higher investment in the UK economy to drive growth

In its annual assessment of the U.K. economy, the IMF called on the UK to invest in skills and infrastructure and increase banking sector competition in order to foster growth and achieve a sustainable recovery.

Adapted from news reports, July 2013

Capital investment and innovation:

  • Capital spending by firms adds to aggregate demand (C+I+G+(X-M)) but also has an important effect on long run aggregate supply.
  • Tax relief on research and development and reductions in the rate of corporation tax
  • A key policy for the Coalition has been the creation of 24 new Enterprise Zones that offer lower taxes and easier planning laws for businesses in designated areas supported by a Regional Growth Fund

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