Chapter 5: Problem 8

A subsidy may provide import-competing producers the same degree of protection as tariffs or quotas but at a lower cost in terms of national welfare. Explain.

Short Answer

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A subsidy may provide the same degree of protection as tariffs and quotas for domestic industries by decreasing their cost of production, allowing them to compete with foreign imports. But it does so hopefully without decreasing national welfare because unlike tariffs and quotas, which raise the cost of goods for consumers and restrict choice, subsidies do not.

Step by step solution

Understanding the concept of tariffs and quotas

Tariffs are taxes imposed on imported goods, they make imported goods more expensive which helps domestic producers as it reduces competition. Quotas on the other hand, are a direct limit or restriction on the amount of goods that are allowed to be imported, also reducing competition for domestic producers. Both these measures shield domestic producers but at a cost of reduced efficiency and consumer freedom.

Understanding the concept of subsidies

A subsidy is a form of financial aid or support extended to an economic sector or institution, field or industry where the government deems it beneficial to the welfare of the economy. It helps domestic producers by reducing their cost of production or offering additional funding, allowing them to compete with foreign competitors.

Comparing and concluding the effect of subsidies, tariffs, and quotas

A subsidy lowers the cost of production for domestic producers which allows them to compete with foreign goods. This can be seen as providing the same degree of protection as tariffs or quotas, as it helps domestic industries to compete. However, they are potentially better for national welfare because unlike tariffs and quotas, which increase the cost of goods for consumers, subsidies do not. Also, subsidies can lead to increased domestic production and potentially lower prices.

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A subsidy may provide import-competing producers the same degree of protection as tariffs or quotas but at a lower cost in terms of national welfare. Explain.

Short Answer

Step by step solution

Understanding the concept of tariffs and quotas

Understanding the concept of subsidies

Comparing and concluding the effect of subsidies, tariffs, and quotas

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