The minister for labor of the small nation of Pembangunan is eager to encourage domestic production of digital clocks.

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QUESTION:

The minister for labor of the small nation of Pembangunan is eager to encourage domestic production of digital clocks. A small clock industry exists, but only a few producers can survive foreign competition without government help. The minister argues that helping the industry would create jobs and skills that will be carried over into other industries by workers trained in this one. He calls for a 10 percent tariff to take advantage of these benefits. At the same cabinet meeting, the minister for industry argues for a 10 percent subsidy to domestic clock production instead, stating that the same benefits to the nation can be achieved at less social cost.

a. Show the following diagrammatically:

i. The effects of the tariff on domestic clock output and consumption.

ii. The beneficial side effects of the tariff described by the minister for labor.

iii. The net gains or losses for the nation as a whole.

iv. All the same effects for the case of the production subsidy.

v. The differences in the effects of the two alternatives on the government’s budget. Which policy would appeal more to a deficit-conscious minister for finance?

b. Can you describe a policy that captures the alleged benefits of worker training better than either the 10 percent tariff or the 10 percent production subsidy?


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