Chapter 20: Problem 42

How would direct subsidies to key industries be preferable to tariffs or quotas?

Short Answer

Expert verified

Direct subsidies to key industries are preferable to tariffs or quotas, as they provide more targeted and efficient support, allow greater control over domestic industries, avoid trade wars, promote innovation and competitiveness, and cause lower distortion to market forces. This allows for a more effective allocation of resources and development of key industries in a global market.

Step by step solution

Direct subsidies

Direct subsidies are financial support provided by the government to specific industries or businesses, to promote growth and competitiveness. They can be in the form of cash grants, tax breaks, or low-interest loans.

Tariffs

Tariffs are taxes imposed on imported goods, making them more expensive in the domestic market. This protects domestic industries from foreign competition, as it makes the imported goods less attractive to consumers.

Quotas

Quotas are limits imposed by the government on the quantity of a specific item that can be imported into the country. This also protects domestic industries by limiting the foreign competition within the domestic market. #Step 2: Discuss the advantages of direct subsidies over tariffs and quotas#

Greater control over domestic industries

Direct subsidies allow the government to have more control over its domestic industries. By providing financial support to key industries, the government can influence their development and growth, thus ensuring their success in the global market.

Targeted and efficient support

Direct subsidies can be targeted towards specific industries that are deemed essential for the country's economy or national security, ensuring that the resources are allocated to the areas where they are needed the most.

Avoiding trade wars

Direct subsidies do not directly involve trade restrictions like tariffs and quotas, and hence, are less likely to result in trade disputes or retaliatory measures from other countries.

Promoting innovation and competitiveness

Direct subsidies can be used to promote research and development activities within key industries, fostering innovation and increasing their competitiveness on the global stage.

Lower distortion to market forces

Comparatively, direct subsidies cause lesser distortion to market forces than tariffs or quotas. While they do involve government intervention, they do not directly affect prices or limit the flow of trade, allowing for a more efficient allocation of resources within the market. In conclusion, direct subsidies to key industries provide more targeted and efficient support, reduces trade disputes and retaliation, promotes innovation, and distorts market forces lesser compared to tariffs or quotas. Therefore, these can be considered preferable to tariffs or quotas in supporting key industries.

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