Cambridge International as and a level Economics Ebook

The eff ectiveness of supply side policies
Some supply side measures, for example increased 
spending on education, may not be very eff ective in the 
short term as they can take a long time to have an eff ect. 
In the long term, however, they have the potential to be 
very eff ective. Th
is is because they may directly tackle 
the problems causing the country’s products to lack 
international competitiveness.
Th
e outcome of supply side policy measures is, 
however, uncertain. For example, cutting income tax may 
encourage some people to work fewer hours if they are 
currently content with their earnings. Providing more 
education and training may not be very eff ective if it is 
not of a high quality or it develops skills that will not be in 
demand in the longer term.
Privatisation may not result in an increase in effi
ciency 
if the privatised industries become monopolies and do not 
take into account external costs and benefi ts. Deregulation 
and trade union reform may also result in increased 
ineffi
ciency if there is market failure in the product 
and labour markets, which laws and trade union power 
initially countered.
Providing subsidies to fi rms may not always result 
in lower prices of domestically produced products. Th
is 
is because the fi rms may not pass on the subsidies to 
consumers and the payment of subsidies may make the 
fi rms complacent. Th
ere is also the risk that subsidies may 
provoke retaliation as foreign governments may see them 
as unfair competition.
Equilibrium and eff iciency: 
Eff iciency is an important 
concept in assessing whether privatisation and 
deregulation have increased the performance of the firms 
that have been aff ected.
KEY CONCEPT LINK
SELF-ASSESSMENT TASK 
5.5
In 2011 Th
ailand’s government introduced a 
scheme whereby it agreed to buy rice from Th
ai 
farmers at a price signifi cantly above the market 
price. It was thought that this measure would not 
only help Th
ailand’s farmers but would also push 
up the global price of rice. With Th
ailand being the 
world’s largest producer, the government thought 
that the reduced supply of Th
ai rice on the global 
market would allow it to sell its stockpiles of rice 
later at a high price. What actually happened was 
that buyers switched their purchases to other 
countries. Th
ese included Bangladesh, India and 
Vietnam, which captured a larger share of the 
global market.
1
How else might the Th
ai government have used 
the money it spent on the scheme to increase the 
country’s share of the global rice market?