Protection Flashcards
Define protection.
Protection refers to any action by the government designed to give the domestic producer an artificial advantage over a foreign producer.
What are the three main types of protection.
Tariffs
Subsides
Quotas
What is the goal of protection?
The goal of protection is to increase domestic production in the protected industries and decrease the consumption of imported goods and services.
Who benefits and who is disadvantaged from protection?
Those that benefit from protection include the owners and workers in the protected industry and sometimes the government in the case of tariff revenue.
Consumers are also disadvantaged as they will have to pay higher prices for both domestic and imported goods and the quantify of goods they can consume will decrease.
The losses from protection always outweigh the gains.
What is a tariff.
Definition: A tariff is simply a tax placed on an import.
It is designed to increase the price of a foreign good or service so that the competing domestic good receives a price benefit.
With the aid of a diagram, explain how tariffs effect the market.
Tariffs are taxes on imports. They result in higher prices for consumers and decreased domestic consumption. Tariffs protect the domestic industry by switching consumption away from imports to domestic goods. Domestic producers gain from increasing output. But other domestic producers, including exporters, suffer because tariffs increase their costs.
Economists are opposed to tariffs because they distort resource allocation and result in a net welfare loss for the economy. A tariff creases a dead weight less equal to areas d+f.
Area e= government revenue.
Consumers are getting less of the product and have to pay a higher price. Their loss more than offsets the gain to producers and the government.
After the tariff, consumer surplus falls to areas a+b. Consumers lose a significant amount -areas c+d+e+f because they must now pay more but receive less.
Areas d and f are not accounted for -this is the lost consumer surplus of the DWL of the tariff.
With the aid of a diagram, explain how subsidies effect the market.
Subsidies are grants or payments made by the government to domestic producers. They are paid for out of the general taxation revenue and directly lower a producer’s cost of production.
A subsidy enables a domestic producer to sell their product at a lower price to compete against imports.
Subsidies are a payment or a grant to domestic producers by the government. They result in lowering the domestic producers’ costs so that they can compete more favourably against imports. This subsidy shifts the supply curve to Ss. Domestic production increases from q1 to q3 while imports are reduced to q3 to q2. While subsidies do not reduce consumer surplus, they still result in a welfare loss for society. The cost of the subsidy (DABW) exceeds the increase in producer surplus (DACW), resulting in a deadweight loss equal to area ABC.
What is a subsidy?
Definition: Subsidies are grants or payments made by the government to domestic producers. They are paid for out of the general taxation revenue and directly lower a producer’s cost of production.
/What are the effects of subsidies on consumers?
With a subsidy, there are no direct adverse effects on consumers. Consumers do however bear an indirect burden in that the cost of the subsidy has to be paid for from government taxation revenue. Subsidies represent an ‘invisible’ tax on consumers. The cost of the subsidy is equal to area DABW. The cost is greater than the benefit by area ABC. Subsidies don’t rise prices or reduce overall consumption.
Is protection efficient?
All forms of protection are inefficient- they all reduce total surplus and crease a dead weight loss for the economy.
Explain the gains from imports. Include a diagram.
If the world price for a good or service (e.g. computers) is below the domestic price from computers then Australia will import computers as we do not have a comparative advantage in producing them.
Computer imports= Q1Q2
Australian consumers of computers will gain, but domestic computer producers will lose.
Consumer surplus increases by areas B, D and E. Producer surplus decreases by area B. Consumers gains more than producers lose. Area D+E is the net increase in total surplus or economic welfare.
Explain the gains from exports. Include a diagram.
If the world price for wheat is above the domestic price for wheat, Australia has a comparative advantage in producing wheat and will export wheat.
Wheat exports= Q1Q2
Australian wheat producers gain, but domestic wheat consumers lose. Consumer surplus falls by areas B and C. Producer surplus increases by areas B, C and F. Notice that producers gain more than consumer lose. Area F is the net increase in the total surplus or economic welfare.
Do most economists agree with protectionist trade policies?
It is very rare to find an economist who agrees with protectionist trade policies. Protection benefits a small group of special interests whereas free trade benefits the general public.
What are seven examples of arguments for protection?
The diversification argument. The infant industry argument. The anti-dumping argument (^main valid ones^) The cheap foreign labor argument The favorable balance of trade argument The increased employment argument The national defence argument.
Explain the diversification argument. Is it valid?
If a country applied the principle of comparative advantage then it may specialize in a narrow range of products. If all resources were employed in just these industries, then changes in world demand and prices would have significant effects on the economy. Protection may then be justified to establish a range of diverse industries. This argument is weakened by the fact that no countries have a comparative advantage in only one or two industries.
Slightly valid.
