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Effectiveness of Supply-Side Policies in Increasing Enterprise

Question

Discuss the effectiveness of supply-side policies in increasing the supply of enterprise to the economy.

Category:

Macroeconomic Factors and Policies

[CIE AS level May June 2018]

Preview Answer


Step ➊ : Define ‘supply-side policies’ and ‘enterprise’ in the introduction.


Entrepreneurship is essential for economic progress and economic growth. Entrepreneurship carries out two main functions. First, the enterprise factor organises the other three factors of production. Second, enterprise involves taking the risk of production, which exists in a free enterprise economy. Consequently, the government may implement supply side policies to promote enterprise. These are policies aimed at increasing Aggregate Supply (AS). They enhance the productive capacities of an economy while improving the quality and quantity of the four factors of production.


Step ➋: Discuss the policies available to increase the supply of enterprise to the economy.


➤ 2.1 Supply-side policies such as grants, reduction in tax rates and tax breaks for investment can be used to increase the supply of enterprise in an economy.

The government can encourage entrepreneurs to start new businesses by lowering the marginal tax rate and encouraging share ownership amongst employees. The government may also help entrepreneurs by not requiring new businesses to pay corporate taxes during their first three years. A cut in corporation tax will increase after-tax profits. This will leave more funds for the business to plough back into investment e.g on new production processes.

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