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 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 department accept that this group of workers is being harmed by increased import, workers who lose their job receive an 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’s inability 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 Pride The rule of thumb is using subsidy, not import barrier.  National Defense Import barrier would help the nation to have or to be ready to produce products that would be important in a future military emergency.  Income Redistribution Import barriers sometimes can redistribute the nation’s income.

The Politics of Protection  When are tariff unlikely ?  When are tariff likely ?