Students have asked for further examples of answers to 25-mark questions for Edexcel. Below I have given an example model answer.
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Question
Evaluate the effectiveness of market-based supply-side policies such as privatisation and deregulation (25 marks).
Possible Answer
Supply-side policies increase the productive potential of the economy. Privatisation means the transfer of a state-owned firm to private individual(s), deregulation is the removing of government rules.
KAA 1 – Privatisation
Supply-side policies such as privatisation can help reduce current account deficits. Take the example of the privatisation of Royal Mail. Privatisation means a private firm has taken over the service of mail delivery. Compared to government ownership, a private firm has the incentive to maximise profits instead of social welfare. So the private firm may cut average costs, reduce X-inefficiency as it now has an incentive to cut costs and in doing so, increase productivity. In the case of Royal Mail, this has meant lower delivery times for mail.
This means the LRAS shifts right from LRAS to LRAS1 and the SRAS shifts right from SRAS to SRAS1 reducing the price level from PL to PL1. This leads to higher economic growth. A lower price level increases export competitiveness, so export demand increases and import demand decreases, so the balance of trade improves and so does the current account. To increase profits, private firms have an incentive to improve the quality of the product and customer service in order to attract more customers. As the firm becomes more efficient over time, it may be able to increase demand for its products and grow, thus increasing sales and hence employment.
Evaluation 1
However the success of privatisation depends on how the firms try to increase their profits. To maximise profits, firms could reduce the quality of the product, which would in fact reduce export demand and hence worsen the current account deficit. Alternatively the firms may choose to fire workers to cut costs and increase profits, increasing the rate of unemployment. Royal Mail cut 1600 jobs after the privatisation. Higher unemployment would generate costs for the unemployed individuals, forcing some into poverty.
Particularly if the firm’s activity is concentrated in a particular area, higher unemployment could also mean lower spending in local shops, causing a negative multiplier effect. This could harm the level of local economic activity. While for Royal Mail, job losses are likely to span across the country, for the privatisation of steel firms such as British Steel under Thatcher, jobs and hence job losses concentrate in areas such as in Corby (where local unemployment reached 30% at the time).
KAA 2 – Deregulation
Another market-based supply-side policy is deregulation. Deregulation reduces costs for firms in terms of the costs paid to lawyers or staff to stick to the regulations. Firms may also face lower costs because of the reduced risk of being fined for overstepping the regulations. This will increase the short-run and long-run aggregate supply in the market, because of the possibility of increasing profits from producing more. Also deregulation may remove barriers to entry, allowing more firms to enter markets and further increasing short-run and long-run aggregate supply. As a result, the productive potential of the economy also increases.
Firms seeing higher profits may lead to higher investment in capital goods and human capital. Not only does this increase SRAS and LRAS further. But as investment is a component of AD (AD = C + I + G + X -M), aggregate demand also rises. Positive multiplier effects may also lead to a further rise in AD.
This means real GDP increases. This will also increase employment, as labour demand is derived demand from demand for goods and services. Increasing real GDP and profits are likely to increase government revenue from taxes too. So the government can reduce the budget deficit and achieve budget balance. For an example of deregulation, consider the Deregulation Bill in the UK, which altered 182 different parts of regulation. For example, eliminating health and safety rules for self-employed workers in low-risk jobs. Self-employed workers would see lower costs and hence higher productive potential. This piece of deregulation covers 800,000 workers.
Evaluation 2
However the success of deregulation depends on the reason for the regulation in the first instance. While some regulations could be excessive, others could be necessary. For example deregulation of health and safety may increase the harm to self-employed workers. This could lead to higher accident rates, more time off work and hence lower productivity.
It could also cause higher government spending on NHS care for those who have accidents at work because of deregulation. In this case the regulation may have had a purpose of preventing the negative externalities generated by work in terms of accidents and healthcare costs. Because of the number of workers affected (800,000), a significant bill for the NHS could even worsen the government budget deficit, which is already large because of spending on welfare schemes during the pandemic.
Conclusion
Overall market-based supply-side policies can be effective in achieving economic growth. However they may come with tradeoffs in terms of reduced protection for workers in terms of risks to jobs or health and safety. For these policies to be successful, they need to be well targeted. For example privatisation should only take place for firms that are likely to be able to grow as a result and hence increase employment.
Deregulation should only occur where the regulations were excessive, for example one could argue that the deregulation of health and safety rules for low-risk self-employed is likely to be effective as the cost of deregulation, in terms of increased accident rates and NHS costs, is likely to be low. The costs may also differ in the short run versus the long run. In the short run, privatisation could cause job losses. Yet over time, if the firm becomes more productive, makes more sales and grows, it could end up hiring more workers than it had initially fired.
Commentary
Overall this answer should score in the top bands for A-level Economics Edexcel A. It should score close to full marks or full marks.
Privatisation and deregulation are two policies students sometimes find difficult to explain. Other market-based supply-side policies could be mentioned. For example removing minimum wages, labour market deregulation or regulations to prevent mergers.
The use of examples in this answer helps to support the analysis.
To view more advice on Edexcel A Economics exam technique, click the blue button below:
Note the conclusion is not a summary of arguments. It tries to make a decision about whether the policies are effective and then tries to justify it. Note you could argue market-based supply-side policies were ineffective instead.
Other possible points you could use include:
Using the Keynesian LRAS. You can show that supply-side policies may not be sufficient on their own. Specifically they may need to be accompanied by demand-side policies when there is high spare capacity in the economy.
Also using the argument that deregulation may lead to more choice if it allows more firms to enter the market.
Other points could also be valid.
To see another sample answer, see the link here:
More Practice and Advice
For more exam technique advice for Edexcel A, see the link here:
To put this into practice, I recommend doing practice and past papers. For example, here are practice papers in the style of Edexcel Economics A:
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