A government plans temporary protection for a new domestic producer of electric buses. Imported buses are cheaper because overseas firms have produced them ...
Question 1 Report
A government plans temporary protection for a new domestic producer of electric buses. Imported buses are cheaper because overseas firms have produced them for many years. Local taxpayers may have to fund a production subsidy.
(a) Explain the infant-industry argument for protection. [2]
(b) Use the information to explain one cost of the policy for the government or consumers. [2]
Answer Details
(a) The infant-industry argument is that a new domestic industry may initially have high average costs because it has not yet gained experience or produced at a large scale. [1] Temporary protection from cheaper established imports gives it time to learn, expand output, lower costs and become competitive. [1]
(b) If the government subsidises the producer, government spending rises. [1] This may require higher taxation, more borrowing, or less spending on other services, so there is an opportunity cost. [1]
Alternatively, import protection can raise the price of buses, reducing consumers' or taxpayers' real income. The policy is justified only if the industry can eventually compete without continued support.
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