Question

Question?

Take a new company in Texas that has a higher cost of production for soft drinks than current soft drink producers in the rest of the world. The sector lobbies the government of TX congress and claims that if they are protected by a tariff they can learn better methods and eventually become a competitive soft-drink producer. label the cost and benefits of adopting this policy. What will need to be evaluated in choosing whether this would be a welfare-enhancing policy or not?

Answer 1

Texas is a new company so it can be treated as infant industry. Infant industry is a new industry which is at a early stage of experience and face low profit because of high cost of production and less yield of goodwill. Here comes a role of government which can protect these industries by imposing tariff. Tariff is basically a tax. It add to a cost of imported good and is one of several policies that a country can enact. Tariff is used by government from time to time to protect its new industries. By adopting this policy can create both cost and benefit to industries and economy.

Benefits of adopting this policy

1) As a point of view of producers they would gain by tariff. Tariff increase the price of imported goods, so it help domestic producers to sell their product and suitable price. hence company in texas can charge high price to domestic consumers and generate revenue

2) It help to decrease unemployment in domestic country. Due to high cost of production and less sale domestic producer fire many workers because they are unable to pay them wages. Due to tariff policy, rise in price of imported goods leads to increase in demand of domestic goods and this help domestic producers to fulfill the current demand by supply more and supply would increase to employ more workers. hence help in decrease unemployment.

3) A tariff primay purpose is to generate revenue for a government. Revenue would pay for salaries, maintenance of port facilities and purchase of raw material required by government.

4) country use tariff policy to develop is economy and protect it from other competitors in real world. as texas is a new company it is growing now so it need protection to become independent until company have mature and independent enough to compete with other companies in world.

Apart from benefits tariff has their cost effect, as it is difficult to decide to which infant industry need protection whether skilled organisation or non skilled one. also it is difficult to decide to what extent they need protection. As in beginning company like texas making revenue because of high cost of imported goods and enjoy as a monopoly in a domestic world but after sometime its efficiency level goes down when it has no competitor available they would produce goods in same manner they used to it. company never tried to use new technology coming in market because of protection from rest of the world. hence eventually consumers have less choice available in purchase of goods. It hurts consumers who want to buy goods made in other countries.

Tariff discourage other countries from exporting goods to other countries which may eventually lead to shortage of goods and services. tariff has an overall effect of discouraging trade between countries which also mean that it may hinder the cooperation between two countries and affect their relationships in long run.

The most important cost that economy faces is Discourage competition. Tariff work to protect the local companies like in texas from other foreign companies. While this help in building local companies, it also eliminates competition which is healthy in the provision of quality and cheap products for consumers.It also discourage foreign investment in domestic industries which has a long term impact in the economy. It discourage international relation with other countries and domestic company like in texas can't globalized in long run.

How to evaluate

Welfare loss or gain it totally depend on size of country whether it is small or large.

let us understand through diagram: