Chapter 5: Problem 9

Rather than generating tax revenue as do tariffs, subsidies require tax revenue. Therefore, they are not an effective protective device for the home economy. Do you agree?

Short Answer

Expert verified

Subsidies, despite being a cost to the home government, can provide strategic and long-term benefits to the home economy. These benefits include promoting local industries, protecting key sectors, and encouraging employment. Therefore, the statement that subsidies are not an effective protective device for the home economy because they require rather than generate tax revenue is not entirely accurate. The effectiveness of subsidies depends on several factors beyond just financial costs and revenues.

Step by step solution

Understanding tariffs and subsidies

Tariffs are taxes imposed on imports that typically generate revenue for a country's government. Subsidies, however, are payments made by the government to local industries. Subsidies require expenditure of government resources, hence are a cost.

Contrasting tariffs and subsidies

While tariffs generate revenue, subsidies consume it. Hence, seen from a revenue perspective, subsidies could be considered less effective. However, this doesn't take into account the potential benefits of subsidies.

Evaluating the benefits of subsidies

Subsidies could aid in the growth and development of local industries, promote employment and protect certain sectors deemed strategically important from foreign competition. Despite being a cost to the home government in the short-term, they could potentially contribute to the home economy's resilience and long-term growth.

Conclusion

Deciding whether subsidies are an effective protective device for the home economy cannot be based solely on their cost. The strategic benefits, socio-economic implications and long-term impact on the home economy should also be considered.

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