Question: As noted in the text, many economists worry about the wisdom of an infant industry tariff strategy as a means to promote industrialization in LDCs. The following exercise gives you a chance to consider the effect of such tariffs.
a Calculate the consumer surplus prior to imposing an infant industry tariff. What, exactly, does this consumer surplus value measure?
b How much was actually spent by consumers on sheets before the tariff? After the tariff?
c Calculate the consumer surplus after the infant industry tariff is imposed. (How much is the tariff?)
d What is the total loss in consumer surplus due to the imposition of the infant industry tariff?
e What are the government's tariff revenues after imposing the tariff?
f What is the producer surplus after the imposition of the tariff?
g How much deadweight loss is there as a result of the imposition of the infant industry tariff?
h Add the totals you obtained from d, e and f. How does this total compare to what you calculated for part c? Explain what you have found and what it means.
i If domestic producers succeed in becoming as efficient as foreign producers by overcoming their transitional inefficiencies, what would be the value of consumers' surplus, assuming the infant industry tariff is removed? Show on the graph where this consumer surplus is.
j How can this infant industry tariff be justified?