Tutorial Questions on Topic 5

Chap. 10: Arguments for & against

Protection
1. A single firms innovations in production
technology often benefit the production of
other firms, because these firms learn about
the new technology and can use some of
the ideas in their own production.

(a) Is there an externality here?

(b) How would an economist rank the

following two
policies in this situation? Why?

(i) A tariff on imports to make sure that

domestic production using the new
technology occurs.
(ii) A subsidy to domestic production to
make sure that domestic production
using the new technology occurs.

(c) What third policy ( a tax or a subsidy

to something )
would the economist recommend as
even better
than these two?

2. What is the specificity rule?

4. What is the infant industry argument for
putting up barriers to imports? What are its
merits and weaknesses?
8. The minister for labor of the small nation of
Pembangunan is eager to encourage domestic
production of digital clocks. A small clock industry
exists but only a few producers can survive
foreign competition without government help. The
minister argues that helping the industry would
create jobs and skills that will be carried over
into other industries by workers trained in this
one. He calls for a 10% tariff to take advantage
of these benefits.

At the same cabinet meeting, the minister for

industry argues for a 10% subsidy to domestic
clock production instead, stating that the same
benefits to the nation can be achieved at less
social cost.

(a) Show the following diagrammatically:

(i) The effects of the tariff on
domestic clock output and
consumption
(ii) The beneficial side effects of the
tariff described by the minister
for labor
(iii) The net gains or losses for the nation
as a
whole
(iv) All the same effects for the case of
the production subsidy
(v) The differences in the effects of the
two alternatives on the
governments budget. Which policy
 would appeal more to a deficit-
conscious minister of finance?

(b) Can you describe a policy that

captures the alleged benefits of worker
training better than the 10% tariff or
the 10% production subsidy?

9. Do you favour or oppose the government

policy of offering extra adjustment assistance
to workers displaced by increasing imports?
Why?

Edition 16
9. Australia has only one firm that makes aircraft.
Without assistance from the government, that firm
has lost most of its business to imports from the
U.S. and Europe. Which of the following policies
would be most costly for the Australian nation as a
whole, and which would be least costly?
Policy A: Paying the lone Australian firm a
production subsidy per plane, without protecting it
against imports.
Policy B: imposing a tariff equal to the
production subsidy in policy A.
Policy C: imposing an import quota that cuts
imports just as much as policy B would.