If additional domestic production will lead to positive spillover effects, then an import tariff that increases domestic production would better adhere to the specificity rule than would a government subsidy to domestic production.

Question

Quizplus · Accepted Answer

The specificity rule suggests that the most efficient way to address a specific market failure, such as positive spillover effects from domestic production, is through a policy that directly targets the source of the market failure. A government subsidy to domestic producers would more directly encourage the production causing positive spillovers, whereas an import tariff would indirectly support domestic production by making imported goods more expensive, potentially leading to broader market distortions.

If Additional Domestic Production Will Lead to Positive Spillover Effects