Protectionist Subsidies and Evaluating Protectionism

Summary

This lesson explores the concept of protectionist subsidies, a tool used by governments to support domestic industries by reducing imports and boosting local production. Using South Korea's apple market as an example, the video explains how subsidies lower production costs, increase supply, and affect various stakeholders. While subsidies benefit domestic producers, they also impose a cost on taxpayers and can result in a loss of total welfare. The lesson concludes by discussing situations where protectionism may be justified, such as for strategic or emerging industries.

Takeaways

• 📉 Governments may use protectionist subsidies to support domestic producers and reduce imports.
• 🍎 The example of the South Korean apple market illustrates how a protectionist subsidy affects supply and demand.
• 💸 A subsidy reduces the marginal cost of production, shifting the supply curve outward, increasing domestic supply.
• 🛑 Unlike tariffs or quotas, subsidies don’t affect the price for consumers, only the quantity supplied by domestic producers.
• 📦 The subsidy allows domestic producers to sell more at the same price, reducing the need for imports.
• 📊 Producer surplus increases due to higher revenues from the subsidy, while consumer surplus remains unchanged.
• 🛑 Foreign producers are harmed by the subsidy since they sell fewer products at the same price, reducing their revenue.
• 💵 The cost of the subsidy to taxpayers represents a loss of total welfare, outweighing the benefits to domestic producers.
• ⚖️ Subsidies can create inefficiencies, as the opportunity cost impacts public spending on other sectors like healthcare and education.
• 🌍 While protectionism generally leads to welfare loss, there are cases where it may be justified, such as for strategic or emerging industries.

Q & A

What is a protectionist subsidy?

A protectionist subsidy is a payment from the government to domestic producers for each unit of the good produced. The goal is to reduce imports, increase domestic sales, and raise revenues for domestic firms at the expense of foreign producers.

How does a subsidy affect the supply curve for a good like apples in South Korea?

A subsidy lowers the marginal cost of production for domestic producers, causing the supply curve to shift outward (to the right). This increases the domestic supply of apples without affecting the price.

Does the price of apples change in South Korea after the implementation of a protectionist subsidy?

No, the price of apples in South Korea does not change with a protectionist subsidy. The world price remains lower than the domestic price, so consumers continue to pay the same price.

What happens to the quantity of apples demanded after the subsidy is implemented?

The quantity of apples demanded remains unchanged because the price remains the same. However, the quantity of apples supplied by domestic producers increases.

How does the subsidy impact the quantity of apple imports in South Korea?

The quantity of apple imports decreases because the domestic supply has increased, reducing the need for imports.

What happens to consumer surplus in the South Korean apple market after the subsidy?

Consumer surplus remains unchanged since there is no change in the price that consumers pay for apples.

How does the subsidy affect domestic producers' revenue?

Domestic producers' revenue increases because they receive the world price plus the subsidy, leading to a higher producer surplus. The subsidy boosts their income despite the price remaining the same for consumers.

What is the impact of the subsidy on foreign producers?

Foreign producers are worse off because the quantity of imports decreases, reducing their revenues. The total revenue for foreign producers is lower after the subsidy.

What is the cost of the subsidy to Korean taxpayers?

The cost of the subsidy to Korean taxpayers is represented by the vertical distance between the two supply curves and the total quantity of apples produced domestically. This cost is borne by taxpayers, potentially reducing funds for other public services or raising taxes.

Is there a net loss in total welfare due to the subsidy?

Yes, there is a net loss in total welfare. While producer surplus increases, the cost of the subsidy exceeds the benefit to producers. This loss is represented by a deadweight loss, or a loss of total welfare for society.