Free Trade and Protectionism Exercise

1. The Government of Australia has decided to protect its infant technology industry. How
could the Government achieve this while raising funds for itself? Explain using a diagram.
(4 marks)

 In order to protect the infant industry and raise funds at the same time, the government
must impose a tariff.
 A tariff is a tax on imports, technology imports in this case.
 A tariff will increase the price of the good from Pw to Pt, reducing imports from Q1-Q2 to
Q3-Q4 and increasing domestic supply from Q1 to Q3.

2. If Australia’s infant tech industry still claims that their Government is not doing enough to
protect them, outline three other safeguards could the Government take. (3 marks)
 The government could limit the number of technology imports to Australia, using a quota,
which would increase consumption of domestic technology.
 The government could subsidise the technology industry, offering the domestic industry
grants to give them an artificial advantage over imported technology.
 The government could increase administrative barriers to technology imports to increase
the time and cost of technology imports, reducing import competitiveness.
 Note: embargo and exchange rate management aren’t really applicable in this scenario.

3. Draw a labelled diagram to represent the effect of a subsidy scheme initiated by

Australia’s Government to protect its infant tech industry. (3 marks)

where Sd = domestic supply

Ss = domestic supply with subsidy
Q1 = domestic supply
Q3 = Domestic supply with subsidy
Q1-Q2 = Imports before subsidy
Q3-Q2 = imports after subsidy

DABW = cost of subsidy

DACW = benefit to producer
ABC = DWL
4. Explain how efficient the tech industry will be with a subsidy in place, with reference to
output, employment, total surplus and the validity of this protectionist policy. (6 marks)

 Subsidies are inefficient as they create deadweight loss – represented by the

area ABC in the previous diagram.
 The tech industry will be able to supply more goods with the subsidy, so
domestic output will increase
 Domestic employment will also increase to keep up with the increase in
domestic supply.
 This increase in output and employment is government supported rather than
being supported by market forces, therefore the increases are artificially
produced.
 Total surplus decreases with a subsidy because of the creation of deadweight
loss after the government intervenes.
 This protectionist policy can be valid to support infant industries as long as
the support is only temporary. The industry should be able to support and
profit itself after a time, if not, resources would be better allocated in other
industries.