supply-side policies for product markets

All of the policies in the product market are designed to increase competition, and so efficiency. If the productivity of an industry improves, then it will be able to produce more with a given amount of resources, shifting the LRAS curve to the right. All of the following policies are, in some way or another, trying to increase the level of competition in product markets.

Supply-side policies and product markets

Privatisation

Privatisation was the major supply side policy on the product market side of the 1980s and 1990s. It became one of the hallmarks of economic policy under Mrs Thatcher and John Major.

The privatisation of various large former state-run industries (telecommunications, electricity, water, steel, gas, rail etc.) was designed to break up the state monopolies to create more competition.

Many of these privatisations simply turned public sector monopolies into private sector monopolies, but there have been efforts to introduce competition into these industries.

The government also created utility regulators who have imposed strict price controls on many of these industries and who are now over-seeing the move towards competitive markets in areas such as gas and electricity supply and telecommunications.

Deregulation

This is closely linked to privatisation. De-regulation 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. The discipline of increased competition should also lead to greater cost efficiency from producers - who are keen to hold onto their existing market share.

Good examples of deregulation to use include: Urban bus transport, parcel delivery services, mortgage lending, telecommunications, gas and electricity supply.

Commitment to free trade

The UK government has signed up to trade agreements brokered by the World Trade Organization. Trade creates competition and should be a catalyst for improvements in cost and lower prices for consumers. The United Kingdom is also a full-paid up member of the European Single Market - promoting free trade and free movement of goods, services, labour and capital throughout the fifteen member nations of the European Union.

Measures to encourage small business start-ups

Small businesses are the lifeblood of the economy. According to the Department for Trade and Industry, there were an estimated 3.7 million active businesses in the UK at the start of 1999. The business stock is 1.3 million higher than in 1980 (the first year for which comparable figures are available). Most of the growth in the business population between 1998 and 1999 has been in the 1-4 employee category.

In 1999, 63% of all businesses involved the self-employed and a further 26% employed between 1-4 additional employees. Over 5.5 million people are employed in businesses with fewer than five people. Nearly three-quarters of the increase in employment between 1995 and 1999 came from small and medium-sized firms, according to research published by the Small Business Service.

A growing range of government policy initiatives have been launched over the years designed to stimulate new businesses.

Business start-up grants
Loan guarantee schemes
Lower rates of corporation tax for smaller businesses
Investment allowances and regional policy assistance for new business start-ups in some areas

Measures to increase corporate investment spending

Capital investment spending is unusual in that it adds to aggregate demand (C+I+G+(X-M)) but also has an important effect on aggregate supply in the long run.

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supply-side policies for product markets

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