3.7.2—Market-based supply-side policies

Market-based policies use incentives and prices, such as lower income/corporate taxes, deregulation, privatisation or labour-market reform.

They may improve incentives and competition but can reduce revenue, worker security or service access.

Identify the incentive change and the condition needed for firms or workers to respond.

Lower payroll tax may encourage hiring if demand for labour is not the binding constraint.

Incentives do not guarantee investment when confidence is weak.

Competition policies include deregulation, privatization, trade liberalization and anti-monopoly regulation. Labour-market reforms include reducing union power or unemployment benefits and abolishing a minimum wage; incentive policies include cuts in personal income, business and capital-gains taxes. Show a successful capacity effect as LRAS shifting right, lowering long-run price pressure and raising potential output. In a minimum-wage diagram, removing a binding wage floor can reduce labour surplus, but lower worker income, weak demand or monopsony can change the result.