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We also have to consider the gain from having the rm

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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...
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