Should your government subsidize domestic firms to enable them to compete more successfully with foreign rivals?

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Expert Solution

The Infant Industry Argument can be used to answer this question. In the short run, the government of a nation should subsidize the infant industries to help them compete with foreign rivals in the industry. Initially if the government subsidizes these firms then their cost of production will fall and this will help these firms in earning profits and use their retained earnings in further developing their businesses and establish themselves in domestic as well as foreign market. However, in the long run the government should stop subsidizing these firms because it will make the firms inefficient and they will have no motivation to improve efficiency by reducing their overall cost of production. Thus, it can be stated that government should subsidize domestic firms in the short run to help them improve their efficiency but in the long run, the subsidies by the government should be reduced and abolished gradually to make them efficient.

Rahul Sunny answered 1 year ago

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