We also have to consider the gain from having the rm

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: tries that deserve infant ­industry protecGon from those that do not? •  SGll, these market failures do not guarantee that the protecGon is worthwhile. –  We sGll need to compare the costs of protecGon today with the benefits of protecGon in the future. Infant Industry ProtecGon The Economics behind Infant Industry ProtecGon: •  Home is a small country and therefore faces fixed world prices for its imports. •  Lets assume there is only one Home firm. •  Increasing output today will lead to lower costs in the future through learning. Infant Industry ProtecGon (a) Today Free trade equilibrium: Price MC PW = MR Free Trade Equilibrium: Pw = MC the Home firm supplies S1 AC P<AC => losses PW D S1 D2 Quan7ty Infant Industry ProtecGon (a) Today Price MC AC PW+t PW b d D S1 S2 D1 D2 Quan7ty Infant Industry ProtecGon (a) Today (b) Future Price Price MC Free Trade Equilibrium: Pw = MC MC AC PW+t PW b AC’ d e D D S1 S2 D1 D2 Quan7ty S3 D1 Quan7ty Infant Industry ProtecGon •  Equilibrium Today –  Free trade equilibrium: the Home firm faces PW = MR producing where PW crosses its MC, supplying S1. –  Given that at S1 average costs are higher than PW, we know the firm is suffering losses and would shut down today instead of producing S1. –  If a tariff, t, is applied then Home price rises to PW+t –  Assume that PW+t just covers the firms average costs. –  The firm produces S2 and since PW+t equals AC at that quanGty, the firm makes zero profits. •  Equilibrium in the Future –  At S2, the firm can lower its costs in the future. –  The effect of learning on producGon costs is shown by a downward shie in the AC curve to...
View Full Document

This document was uploaded on 01/18/2014.

Ask a homework question - tutors are online