Question 1

A positive externality occurs whenever:

Accepted Answer

A positive externality occurs when the actions of one party result in benefits to others, such as when an increase in the output of one firm lowers costs for other firms.

Question 2

Some nations try to nurture and encourage new firms with lots of promise, so they protect them from foreign competition. This is called the _________ argument for trade protection.

Accepted Answer

The argument described is the "infant industry" argument, which states that new and promising industries need protection from foreign competition in order to develop and become competitive in the global market.

Question 3

A knowledge spillover occurs when firms:

Accepted Answer

Knowledge spillovers occur when firms adopt successful innovations and ideas from other firms. This can happen through a variety of channels, including informal communication between employees, professional meetings and conferences, and published research. Restricting trade, wasteful expenditure, and keeping secrets are unlikely to lead to knowledge spillovers.

Question 4

A knowledge spillover is a(n):

Accepted Answer

A knowledge spillover is a positive externality because it involves the unintentional sharing of information or knowledge between individuals, firms, or industries, which can result in increased productivity, innovation, and economic growth.

Question 5

Infant industries are:

Accepted Answer

Infant industries are industries that cannot currently withstand foreign competition but are expected to grow and mature so that they can eventually compete on an international level. This could be due to factors such as lack of resources or experience, high start-up costs, or low economies of scale. Governments may provide protectionist measures such as subsidies or tariffs to support these industries until they reach a level of competitiveness.

Question 6

What is the term used to describe banks' unwillingness to lend to a firm because they do not know with certainty that the firm will achieve lower costs and be profitable enough in the future to repay the loan?

Accepted Answer

This scenario is described as a market failure, specifically due to information asymmetry where banks cannot accurately assess the risk of lending due to insufficient knowledge about the firm's future profitability.

Question 7

Suppose the world price of pencils is $0.25 each and a country's firm that produces pencils has an average cost of $0.35 each. What will the firm do?

Accepted Answer

The firm's average cost of production is higher than the world price, which means it is operating at a loss. In the long run, the firm will not be able to sustain losses and will ultimately shut down.

Question 8

Assuming a firm would not survive without protection, what should the government do if the present value of the profits and value added from operating an infant industry firm exceed the deadweight loss of imposing protection?

Accepted Answer

If the present value of the profits and value added from operating an infant industry firm exceed the deadweight loss of imposing protection, it is economically efficient for the government to impose the tariff. This is because the gains from protecting the infant industry outweigh the losses. However, the government should also ensure that the protection provided is only temporary and that the industry is eventually able to compete on its own.

Question 9

The U.S. International Trade Commission rejects many antidumping and countervailing duty allegations because there is:

Accepted Answer

The U.S. International Trade Commission often rejects allegations when there is insufficient evidence that a U.S. industry is materially injured due to dumping or export subsidization, even if dumping or subsidization is occurring.

Question 10

There are several conditions that justify limiting imports to ensure the survival of the "infant industry" and to justify government protection. Which of the following is(are) a justification?

Accepted Answer

The answer of There are several conditions that justify limiting...

Question 11

To justify infant industry protection:

Accepted Answer

Infant industry protection is a policy that promotes and protects new industries in the early stages of development. These industries may face high startup costs, lack economies of scale, and be unable to compete with established firms. However, as they gain experience, learn from their mistakes, and exploit economies of scale, their average cost curve will shift downward over time, and they will become more competitive. Therefore, to justify infant industry protection, a firm's average cost curve must shift downward over time.

Question 12

Which of the following is a justification for infant industry protection?

Accepted Answer

Infant industry protection is justified if the firm can lower its average costs over time through learning and experience, eventually becoming competitive at world prices.

Question 13

Which of the following unfair trade remedies is used LEAST often?

Accepted Answer

Safeguard or escape clause duties are used only in exceptional circumstances when a surge in imports causes serious injury to the domestic industry, and therefore are the least frequently used trade remedy. Antidumping and countervailing duties are the most commonly used trade remedies to combat unfair trade practices.

Question 14

It is better to protect an infant industry with a _______ than a ________.

Accepted Answer

A tariff is generally considered a better method to protect an infant industry than a quota because tariffs generate revenue for the government and can be gradually reduced as the industry becomes more competitive, whereas quotas can lead to shortages and higher prices without generating revenue.

Question 15

"Infant industry protection" refers to:

Accepted Answer

"Infant industry protection" specifically refers to a country's use of protection measures (such as tariffs and quotas) to safeguard young or "infant" industries until they are able to compete on the global market. This is typically viewed as a short-term strategy to encourage domestic production and competitiveness. Option A is a broader use of protection and may not necessarily be focused on young industries. Option B is not related to the concept of infant industry protection. Option D is a specific use of protection but not directly related to the protection of young industries.

Question 16

To make a correct decision about limiting imports on behalf of an infant industry, a government should look at:

Accepted Answer

A cost-benefit analysis that considers the present value of the benefits of lower production costs compared to the cost to society of higher prices in the present is the most appropriate approach to determine whether to limit imports. Political pressure and the retention of jobs are important factors but should not be the only considerations. The difficulty of keeping out imports from established trading partners and the number of workers employed in the industry are also important but should not be the sole determinant of the decision. A comprehensive cost-benefit analysis provides an objective basis for making the decision.

Question 17

Which of the following is(are) why antidumping actions are used more frequently than safeguard actions? I. It is easier to meet the criterion that imports have caused "material injury" to a domestic industry than the criterion that imports were a "substantial cause of serious injury."
II) The President does not need to approve antidumping duties.
III) The President has to approve duties imposed under safeguard actions.

Accepted Answer

Antidumping actions are used more frequently than safeguard actions because it is easier to meet the "material injury" criterion than the "substantial cause of serious injury" criterion, the President does not need to approve antidumping duties, and the President must approve duties imposed under safeguard actions.

Question 18

What are the likely effects of a U.S. antidumping duty on imported steel?

Accepted Answer

If the U.S. imposes an antidumping duty on imported steel, the U.S. price of steel will rise, making it more expensive for U.S. consumers and businesses to purchase steel. This would result in deadweight losses, as some consumers and businesses may forgo purchasing steel altogether or seek out alternative, possibly less efficient or effective, materials. Additionally, the foreign price of steel could rise as a result of the U.S.'s actions, as other countries may retaliate with their own tariffs on U.S. goods. This could further worsen the U.S.'s terms of trade.

Question 19

The European Union applied temporary antidumping and countervailing duties on Chinese solar cells in 2013. These duties were extended in 2015 because the European Commission determined that:

Accepted Answer

The European Commission extended the duties because they found that Chinese manufacturers were circumventing the original duties by shipping their solar cells through third countries like Taiwan and Malaysia.

Question 20

Why is it better to protect an infant industry with monopoly power with a tariff than a quota?

Accepted Answer

A tariff can provide incentive for domestic production to increase to meet the demand, whereas a quota limits the amount of domestic production allowed, possibly leading to a shortage of the product. Additionally, a tariff can still allow for some foreign competition, whereas a quota completely restricts foreign imports.

Quiz 9: Import Tariffs and Quotas Under Imperfect Competition