Question

Explain the concept of an infant industry and why governments may protect it with a tariff. What conditions must be true for this protection to result in a welfare gain for the economy over time? How successful do such attempts seem to be in developing countries and what problems make it difficult to achieve success?

Answer 1

The infant industry is the industry that is still in its initial or early stages of development. The government of the country may decide to protect such industries with tariffs or other such restrictions so as to protect it from international competition.

In order to maximize welfare, the country imposes import tariffs. So whatever is imported into the country of that industry would have high prices. This would encourage domestic producers to produce more. This would hence increase the welfare of the nation.

Infant industry argument is mainly based on the fact that the economy needs to protect the new industries from the outside competition so that they can grow stable over time and compete with the international standards of foreign market. This is mostly done by developing countries to protect their new industries.

But it is seen that even after the industry has gained momentum, it is still difficult to remove the tariffs or the protection once given to the domestic companies and hence this continues for a long period, harming the consumers who could have gained from better quality and prices and also causing a social welfare loss.

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