MICROECONOMIC REFORM
VCE ECONOMICS
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Microeconomic Reform
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Microeconomic reform refers to government
policies which aim to improve the individual
sectors of the markets to become more
productive and efficient.
This process will inevitably involve removing
government and regulatory impediments.
It will also include encouraging competition
throughout the economy to reduce costs.
Productivity
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American economist Paul Krugman
said:
‘a country’s ability to raise its standard
of living over time depends almost
entirely on its ability to raise its output
per worker’
Productivity
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Productivity improvements will come
from:
1. improved technology
2. education and retraining
3. removing regulatory barriers to trade and
commerce so markets can operate more
efficiently
4. improved methods of using resources
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Efficiency
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Microeconomic reform works by
improving the efficiency of the
economy’s supply side. There
are several meanings to the term
efficiency:
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Productive/technical – largest
output per unit input
Allocative – resources are
allocated to minimum opportunity
cost
Dynamic – Ability to develop
innovation and adapt to change
Possible areas of
microeconomic reform
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Below are some possible areas
of microeconomic reform for
an economy:
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Removing protection – almost all
countries have some form of
protection for domestic industry,
in the form of tariffs, subsidies
and quotas. Removing this
protection will allow a nation to
specialise in its most efficient
industries and make best use of
its resources.
Possible areas of
microeconomic reform
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Deregulation – many countries have
regulated industries, for instance
airline or financial industries. This may
be in the form of limiting the number of
companies with the license to provide
the service. Removing these
regulations will open up the industry to
more competition, and encourage
companies to lower their cost structure
and become more efficient.
Possible areas of
microeconomic reform
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Privatisation – Exposing
former public enterprises to
competitive forces makes
these companies more
market focused and
increases company
efficiency. This results in
lower prices and better
services for consumers.
Possible areas of
microeconomic reform
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Labour market reform –
linking wage increases
with increasing
productivity per worker
will encourage a more
flexible and efficient
labour market.
The benefits of
microeconomic reform
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Overall, microeconomic
reform will lead to an
increase in the level of
economic growth and
therefore increase the
standard of living.
The benefits of
microeconomic reform
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Specific benefits which should accrue
are:
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Increase in employment and therefore
reductions in unemployment (in the
medium to long term)
Reduce the level of inflation through
increased supply
Encourage diversification and promotion
of value added products
Improve external balance
The End
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