Session 10

Arguments for and against Protection

Incentive Distortions and Their Effect

Specificity Rule • If an externality is present, government policy should

intervene as directly as possible on the specific source of the externality, to most enhance national economic efficiency.

• If a country has some other objective, government policy should intervene as directly as possible on the specific objective, to minimize the national economic cost of achieving the other objective (that is, to minimize the amount of economic inefficiency created).

• Key: Identify the specific problem clearly, then use a policy to attack the problem directly.

Promoting Domestic Production or Employment (Small Nation)

$30 paid by the government.

Budget for Subsidy

Producer Surplus

Deadweight LossDeadweight Loss

The Infant Industry Argument

Without tariff, produce would produce none

Producer surplus produced in the future

The Dying Industry Argument

It depends on whether area “g” is greater than areas “b+d” (or “b” ).

Trade Adjustment Assistance for Dying Industry

For instance, in the U.S. workers can petition the U.S Department of Labor for this assistance. If the departmentaccept that this group of workers is being harmed byincreased import, workers who lose their job receivean extra 12 – 18 months of unemployment compensation (in addition to 6 months for job search and moving expenses.

The Developing Government (Public Revenue ) Argument

For a developing nation with low living standards, the most serious “domestic distortion” may relate to the government’sinability to provide an adequate supply of public goods.

As argument goes, the developing government states that in poor developing nations the import tariff becomes a crucial source, not of industrial protection but of government revenue.

Other Arguments for Protection :Non-economics Objectives

National PrideThe rule of thumb is using subsidy, not import barrier.

National DefenseImport barrier would help the nation to have or to be ready to produce products that would be important in a future military emergency.

Income RedistributionImport barriers sometimes can redistribute the nation’s income.

The Politics of Protection

When are tariff unlikely ?

When are tariff likely ?