Question

8. The minister for labor of the small nation of Pembangunan is eager to encourage domestic production of digital clocks. A small clock industry exists, but only a few producers can survive foreign competition without government help. The minister argues that helping the industry would create jobs and skills that will be carried over into other industries by workers trained in this one. He calls for a 10 percent tariff to take advantage of these benefits. At the same cabinet meeting, the minister for industry argues for a 10 percent subsidy to domestic clock production instead, stating that the same benefits to the nation can be achieved at less social cost.

a. Show the following diagrammatically:

1. The effects of the tariff on domestic clock output and consumption.
2. The beneficial side effects of the tariff described by the minister for labor.
3. The net gains or losses for the nation as a whole.
4. All the same effects for the case of the production subsidy.
5. The differences in the effects of the two alternatives on the government’s budget. Which policy would appeal more to a deficit-conscious minister for finance?

b. Can you describe a policy that captures the benefits of worker training better than either the 10 percent tariff or the 10 percent production subsidy?

Please No bad handwriting! Thanks :)

Answer 1

Answer 0 0 O Caer ~ The minister for labor of the Small nation of pembangunan as Sager to encouage domestic production of digital clocks. . The tariff would raise domestic price from world price Po The tariff inculsive pricePi.. Domestic production increased from Sotos, & domestic Condemption folle from Dodo D, Increasing domestic production from s tos, The country gains External benefits Equal to area Tariff causes usual production Ę consumptin. Pn Elficiences Squel to Weas band. The net gan or loss to country as difference betwers n - + ON area 9 and (b+d).

S d. price pel Clock so s bi Quantity MEB pel clock. ,91 МЕр Т o s - Quantity - A production Subsidy Prstead of a tariff The market price remains at Poo Domestic Consumption remains at Do. producers receive revenue pecunit produced Equal top. that includes both market price and government subsidy per unit produced thep ancrease domestic Droduction from so to si.

By increasing dermestic productin from sos, The country gaine External benefits Squal to areag. 1. The production subsidy caused a production in Efficiency Equal to area b. but it don't destort domestic consumption. The net national gain con las to country is difference bho area gand b. we expect from the Specific role. De production subsidy is better. policy. it create a large met Economic opin. for the courstro. because it act more directly. on Sauce of incentive distortion. Tariff create revenue to government Equal. - Creaci The production Subsidy Creates a cost to government Equal to area (a+b). The deflicft conscious finance minister looking at govt budget. that Jaroue he tariff b. Specificity rule Support Worker indicate training that best policy to. directly or Subsidize.