arguments for and against protection

Direct democracy makes tariffs less likely to be voted into law because: a. the number of people who are hurt by protectionist measures exceeds the number of people who gain from protectionist measures. b. the majority of voters recognize that tariffs are inefficient and therefore would vote for a production subsidy instead of an import tariff. c. the size of the individual losses to each voter would be larger than the individual losses to each of the winners from any potential protectionist measure. d. "free riders" would ensure that everyone got to the polls to vote.

a

In the U.S., trade adjustment assistance: a. will provide workers who have been displaced from import-competing firms with an additional 6 to 12 months of unemployment compensation as well as retraining programs and subsidies for job search and moving costs. b. is efficient in both a first-best and second-best environment. c. provides incentives for workers to search for new jobs outside the import-competing industry prior to them losing their jobs in the import-competing industry. d. All of the above.

a

Refer to Figure 9.1. If the area t = $6 million then: a. the nation is better off by $750,000 as a result of the tariff being imposed on imports of foreign cars. b. the nation is better off by $4.5 million as a result of the tariff being imposed on imports of foreign cars. c. the nation is worse off by $11.25 million as a result of the tariff being imposed on imports of foreign cars. d. the nation is worse off by $4.5 million as a result of the tariff being imposed on imports of foreign cars.

a

Refer to Figure 9.1. Which area(s) in the figure represents a loss to the nation as a result of the nation producing cars at a greater expense than the car could have been bought for abroad? a. r b. s c. r + s d. t

a

The French highly value domestic production of traditional French cheeses made by high-cost, traditional production methods. The most efficient policy tool to protect this traditional industry in a second-best world would be: a. a production subsidy. b. an import tariff on cheeses produced outside of France. c. an import ban on cheeses produced outside of France. d. free trade since no protectionist policy would be efficient in a second-best world.

a

Which of the following arguments for protection derives from the fact that funding of public goods in some countries is difficult given little or no means to collect income or sales taxes? a. developing government argument b. infant industry argument c. dying industry argument d. national defense argument

a

Free trade is economically efficient in a first-best world.

true

Government loans are more efficient than production subsidies if a young industry faces financial markets that are unwilling to provide funding to the industry due to the high risk.

true

Import tariffs are efficient second-best policy solutions for many developing countries where government revenue is difficult to obtain by other means such as an income or sales tax

true

In a first-best world, price, marginal benefit, marginal cost, marginal social benefit, and marginal social cost are all equal at the margin.

true

The specificity rule states that the most efficient way to correct a distortion is to use a government policy tool that is directed at the source of the distortion.

true

If an economy has significant income inequalities that result from free trade, then the most efficient policy solution in a second-best environment is: a. an import tariff. b. a production subsidy. c. a tax-and-transfer program that redistributes income from wealthier citizens to poorer citizens. d. an import quota.

c

Refer to Figure 9.2. As a result of the subsidy, domestic manufacturers will produce _______ and domestic consumers will consume_______. a. 8,500 cars per year; more cars than they did before the subsidy was provided b. 7,000 cars per year; 15,000 cars per year c. 1,500 additional cars per year; the same number of cars that they did before the subsidy was provided d. the same number of cars that they produced before the subsidy was provided; the same number of cars that they did before the subsidy was provided.

c

Which of the following arguments for protection states that import-competing firms that are struggling to stay in business should be provided protection in order to maintain jobs and continue domestic production? a. developing government argument b. infant industry argument c. dying industry argument d. national defense argument

c

Which of the following is a plausible solution to a distortion? (1) Impose a tax or subsidy in order to adjust for the fact that either SMB or SMC exceeds price. (2) Rearrange property rights in order to make the decision makers consider the distorting effects when making their decisions. (3) Impose an importation ban. a. (1) b. (2) c. (1) + (2) d. (1) + (2) + (3)

c

Which of the following is not an expected effect of a tariff or nontariff barrier (NTB) on a product? a. An increase in domestic production of the product. b. An increase in the employment of labor and other resources used in the domestic production of the product on which the tariff or NTB is being imposed. c. An increase in domestic consumption of the product. d. An increase in government revenue.

c

Which of the following statements is true? (1) If young firms are struggling to obtain funding from underdeveloped financial markets, the most efficient policy solution would be a production subsidy. (2) If young firms are struggling to retain their trained workers, then government should offer a subsidy to offset the costs of training workers. (3) Infant industry tariffs are less likely to be removed than infant industry subsidies. a. (1) + (2) b. (1) + (3) c. (2) + (3) d. (1)

c

Which of the following statements reflects a situation in which there are external benefits? (1) John's decision to get vaccinated for smallpox reduces the chances that his neighbor Pete will get smallpox. (2) John pays for a professional fireworks show for his family. The neighbors also enjoy the show. (3) John paints his house and cleans his brushes in the stream. The solvent John uses to clean his brushes kills the fish. Fishermen, who previously had enjoyed fishing from the stream, are unable to catch any fish. a. (1) b. (2) c. (1) + (2) d. (1) + (2) + (3)

c

Which of the following statements is true? (1) In a first-best world, import-competing firms that were struggling to stay in business would be allowed to go out of business and workers would find jobs in other industries. (2) In a second-best world, the most efficient way for government to correct for workers being displaced when industries die being unable to find jobs in the resulting congested labor markets is to provide subsidies for those workers to move to areas where there are jobs. (3) In a second-best world, if workers do not have the skills for new jobs after they lose their jobs in dying import-competing industries, the most efficient government policy would be subsidies to pay for retraining those displaced workers. a. (1) + (2) b. (2) + (3) c. (3) d. (1) + (2) + (3)

d

Refer to the situations illustrated in Figures 9.1 and 9.2. Assume that the areas r and g are the same size in both figures. Which of the following statements is true? (1) The tariff and the subsidy could both result in net losses to the economy. However, the loss from the tariff would necessarily be larger than the loss from the subsidy. (2) The tariff and the subsidy could both result in net gains to the economy. However, the gain from the tariff would necessarily be smaller than the gain from the subsidy. (3) The tariff could result in a net loss to the economy while the subsidy could result in a net gain to the economy. a. (1) + (2) b. (2) + (3) c. (1) + (3) d. (1) + (2) + (3)

d

Refer to the situations illustrated in Figures 9.1 and 9.2. Which of the follow statements is true? (1) The subsidy is a better policy tool because it encourages domestic firms to produce additional units while resulting in lower costs than the tariff approach. (2) According to the specificity rule, the tariff more directly targets the source of the problem--foreign production replacing domestic production. (3) Given the situation illustrated in the figures, the production subsidy would result in no change in the level of domestic consumption while the tariff would reduce the domestic consumption of cars. a. (1) b. (2) c. (1) + (2) d. (1) + (3)

d

The _______ states that if a distortion is present, the most efficient way to eliminate the discrepancy between social and private benefits or costs is to use a policy tool that is directed at the source of the distortion. a. direction rule b. spillover effect c. distortion incentive d. specificity rule

d

Which of the following arguments for protection states that countries may need to impose trade barriers in order to protect industries that may be needed in time of war? a. developing government argument b. infant industry argument c. national pride argument d. national defense argument

d

Which of the following distortions makes the infant industry argument for protection valid? a. Imperfections in developing financial markets might mean that banks and other institutions are unwilling to provide funding to firms in an infant industry. b. Firms who enter the industry first bear the highest costs while firms who enter the industry later have lower costs by learning from the experiences of the original firms. c. Young firms that produce important military hardware cannot be established without government support. d. Both a and b.

d

Which of the following relationships represents a first-best world? a. SMC > P = MB = MC = SMB b. P > SMC c. P with tax > SMC d. P = MB = MC = SMB = SMC

d

If SMC > MC = P = MB = SMB, the distortion can be eliminated if government pays a subsidy equal to SMB - SMC.

false

If additional domestic production will lead to positive spillover effects, then an import tariff aimed at increasing domestic production would better adhere to the specificity rule than a government subsidy aimed at increasing domestic production.

false

In a representative democracy, it is likely that consumers will be able to keep protectionist measures from becoming law because consumers have more to lose and they are a larger group than the potential winners from any protectionist measure.

false

In direct democracy protectionist measures would be more likely to be put in place than they would with representative democracy.

false

In the absence of any other distortion, a tariff will create a distortion, but a government subsidy will not create a distortion.

false

In a second-best world, there are: a. incentive distortions. b. externalities. c. spillover effects. d. all of the above.

d

Klokionia recognizes that it has only one farm that produces food. That farm produces at a very high cost. Klokionia imports the majority of its food from other parts of the world. Fearing that its army could be starved into capitulation in any war, Klokionia should: a. stockpile food during peace in case of any future war. b. subsidize domestic food production. c. impose tariffs on food imported from abroad. d. ban food imports in order to ensure the vitality of the domestic means of food production.

b

Refer to Figure 9.1. Which area(s) in the figure represents a loss to the nation as a result of consumers being discouraged from purchasing goods that would have brought more enjoyment to the consumers than the world price of a car. a. r b. s c. r + s d. t

b

Refer to Figure 9.2. If the area t = $4.3 million, then: a. the nation is worse off by $200,000 as a result of the subsidy being provided to domestic car manufacturers. b. the nation is better off by $2.05 million as a result of the subsidy being provided to domestic car manufacturers. c. the nation is better off by $200,000 as a result of the subsidy being provided to domestic car manufacturers. d. the nation is better off by $6.55 million as a result of the subsidy being provided to domestic car manufacturers.

b

Tariffs imposed by a developing country: a. may benefit the country because they represent an efficient mechanism for collecting revenue, but are unlikely to benefit the rest of the world. b. can benefit both the country and the rest of the world by creating net social gains. Such tariffs likely represent the most efficient means of government revenue for a country with limited means of collecting income or sales taxes. c. will be as inefficient as tariffs imposed by developed countries. d. are likely to represent only a very small fraction of government revenues because the volume of imports to developing countries is relatively small.

b

Which of the following arguments for protection postures that temporary protection is needed for an industry with initially high costs and lower costs in the long run? a. developing government argument b. infant industry argument c. dying industry argument d. national defense argument

b

Which of the following statements is valid? (1) Even though the total number of losers from protectionist measures is larger than the total number of winners, with representative democracy, protectionist measures are more likely to be put in place because losers see the amount they each are going to lose to be too small to warrant their political involvement. (2) The free-rider problem is more pronounced in larger groups. Therefore, despite the fact that losers from protection represent a larger proportion of society, they are less likely to fight protectionist measures. (3) Even in representative democracy, one would expect that potential losers would be willing to spend on lobbying efforts up to the total amount that they could lose from the protectionist measure, while potential winners would be willing only to spend up to the amount that they might gain from the measure. The result is that the losers mount larger lobbying effort given their larger amount to spend and thereby cause the defeat of the measure. a. (1) + (2) b. (2) + (3) c. (3) d. (1) + (2) + (3)

d