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1 1 Arguments For & Against Protection • The Case against Free Trade – Protectionist Argument #3: The Dying Industry – Protectionist Argument #4: Government Revenue – Protectionist Argument #5: National Pride – Protectionist Argument #6: National Defense – Protectionist Argument #7: Income Redistribution • The Politics of Protection 2 Protectionist Argument #3 •T h e dying industry argument states that a country needs to protect domestic production and workers if rising imports threaten the well-being or survival of import-competing domestic firms and industries. Protection is justified on the basis that this production and/or employment avoids negative externalities . 3 Protectionist Argument #3 Negative externalities could exist if the resources used in the industry—the workers, the managers, the capital, the land, etc.— cannot be quickly redeployed to other industries. 4 Protectionist Argument #3 Resource adjustments do not always work quickly or smoothly. If the import-competing industry is geographic- ally concentrated, then labor markets can become “congested”. Unemployed resources lose all of their income, not just the producer surplus that would occur if they could
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2 5 Protectionist Argument #3 D S S 0 S 1 D 1 D 0 Q P P T P W S 0 S 1 Q P MEB 6 Protectionist Argument #3 • Change in: Consumer surplus = Producer surplus = Government revenue = Marginal external benefits = – Net effect on welfare = 7 Protectionist Argument #3 • Summary for a small importing country: – A tariff may lead to a either a
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This note was uploaded on 02/09/2011 for the course ECON 181 taught by Professor Kasa during the Fall '07 term at Berkeley.

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