Suppose you are a policy maker in the U.S. who wants to provide protection to im
ID: 1107838 • Letter: S
Question
Suppose you are a policy maker in the U.S. who wants to provide protection to import-competing producers. Which of the following policies will you choose? Explain why. (Hint: Which of the following policies would be most costly for ABC nation as a whole, and which would be least costly?)
1) Policy A: Paying the domestic firms a production subsidy per unit produced without protecting them against imports.
2) Policy B: Imposing a tariff equal to the production subsidy in policy A.
3) Policy C: Imposing an import quota that cuts imports just as much as policy B would without auctioning the import licenses.
4) Policy D: Imposing an import quota that cuts imports just as much as policy B would by auctioning the import licenses.
Explanation / Answer
Out of the possible options for the policy maker, the appropriate policy would be to impose import quota that would cut the imports equal to the 1 reduced by a tariff but that would be done by auctioning the licences. This will generate income for the Government and there will be no deadweight loss as the market equilibrium will be determined. Note that import quota will fix the amount of imports so that the degree of competition is also restricted for the domestic industries which is our main concern here.
Therefore option for policy d is correct