A problem encountered when implementing an \"infant industry\" tariff is that: a

Question

A problem encountered when implementing an "infant industry" tariff is that:

a.

Domestic consumers will purchase the foreign good regardless of the tariff

b.

Political pressure may prevent the tariff's removal when the industry matures

c.

Most industries require tariff protection when they are mature

d.

Labor unions will capture the protective effect in higher wages

a.

Domestic consumers will purchase the foreign good regardless of the tariff

b.

Political pressure may prevent the tariff's removal when the industry matures

c.

Most industries require tariff protection when they are mature

d.

Labor unions will capture the protective effect in higher wages

Explanation / Answer

Ans: (B)

Infant industry argument is given for the sake of protection of new industries which cannot face the fierce competition especially by foreign high capacity firms. If these industries are not protected the flood of cheap or high quality imports would hamper the growth of these industries.

Protection can be provided by imposing tariffs on imports so as to bring the new industries to the level of strong foreign players. Problem arises when either these tariffs reduce the incentives for these new domestic industries to grow and reach to newer heights or make them complacent after reaching to some good heights.

Typical example is of India. Where just after independence infant industries, especially heavy industries were protected through these tariffs. But political pressure led to the continuance of the regime and later the Public sector got too self complacent after getting some headstart. The major reason was tough political pressure which didnot allow the free market to come in easily.

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