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IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

A government privatises a loss-making state-owned insurer by selling it to private investors. Which outcome is the main supply-side argument in favour of this policy?

The main supply-side argument is that private ownership brings the profit motive and shareholder scrutiny, giving managers stronger incentives to cut costs and improve efficiency. Lower prices, higher employment and freedom from regulation are not guaranteed, and the state gives up future dividends once it sells.

  1. AThe profit motive and exposure to shareholder scrutiny should raise efficiency and cut costsCorrect
  2. BPrices are guaranteed to fall because the new owner has monopoly power
  3. CGovernment revenue is permanently increased because dividends flow to the state
  4. DEmployment is certain to rise because private firms hire more workers
  5. The insurer will no longer be subject to any regulation

Explanation

The supply-side case rests on incentives: private owners seek profit and face capital market discipline, so managers have reason to cut costs and improve service. Outcomes such as lower prices or higher employment are not guaranteed, the state loses future dividends after a sale, and regulation usually continues for insurers.

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