Protectionism Flashcards
Winners and losers in Tariffs
Consumers lose- from a+b+c+d+e+f (at world price) to a+b
Producers gain- from g (at w.p) to c+g
DWL- d+f, cost to society represented by market inefficiency
(Lw divided by 2)
Govt revenue- e, calc=size of taxnumber of imports (area of rectangle)
Effect of tariff
Decreases imports on protected industry
However, may result in lower exports for other producers and
May result in a decrease in net employment
If tariff was imposed to the world price what would government revenue be?
$0
Define tariff
A form of tax on imported goods
Define subsidies
A payment/grant to domestic producers from the government
They allow producers to reduce the price at which they sell goods
same as reducing cost of production, shift to right
Why are subsidies problematic
Government intervention means resources are allocated inefficiently
Also allows abuse of resources on the environment
Why are subsidies introduced
To increase competitiveness by incubating domestic job market
Often in the hopes that a subsidie will one day be deemed obsolete
However that is often only delaying the inevitable eg. Aus auto manu was protected (in part) in name of national defence
What is protectionism
Refers to any action by govt designed to give the domestic producer an artificial advantage over the foreign producer
Protectionism is rare because free trade means
Encourages high quality goods, ec growth and lower prices
Increases real income and standards of living
Allows consumption to be greater than production
Specialisation and trade= consumption beyond ppf
Countries who protect industries
USA- sugar, beef, wheat, steel
Jpn- rice and other foods
France- wheat
Arguments for protectionism
Infant industry Diversification Anti-dumping National defence Increased employment Cheap foreign labour Favourable balance of trade
Arguments against protection
Increases prices for consumers Tariffs distort resource allocation Tariffs reduce exports Redistribution of income (to govt away from households and efficient firms) Retaliation Less innovation Tax on exports Protection worsens poverty
