Supply-side policies GapFill

A variety of supply-side economic policies are also available to the government. It is important that you are familiar with two different approaches to supply-side policy implementation.

Some supply-side policies are focused on minimising the role of government in the functioning of the economy, assuming that a natural equilibrium will be reached when the economy is left to function by itself. This is known as the  Keynesianclassicalinterventionistmarked-based approach. An advantage of this approach is that it requires minimal government action, which places less risk on  an output gapnegative externalitiesgovernment failurepublic finances. A disadvantage of this approach is that it is more likely to create  government failurenegative externalitiesan output gappublic finances, such as poverty or environmental damage. 

In contrast, some supply-side policies advocate strategic government involvement in the functioning of the economy on a more regular basis, in order to correct market failures and improve overall economic performance. This is known as the  classicalmarket-basedKeynesianinterventionist approach. An advantage of this approach is that it can respond to  negative externalitiesgovernment failurepublic financesan output gap by targeting policies at specific areas of the economy which are underperforming. A disadvantage of this approach is the risk of  public financesan output gapgovernment failurenegative externalities based on incomplete information, which could compound rather than resolve an economic problem.

The primary aim of all supply-side policies is to improve economic performance by boosting productivity and the efficiency of the production process. They are less suitable during a period of recession as they are generally unable to respond to a lack of  employmenttradeaggregate demandeconomic growth.