How this can prevent development of a domestic industry
Course:- Econometrics
Reference No.:- EM131134880

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A country currently imports automobiles at $8,000 each. Its government believes that, given time, domestic producers could manufacture autos for only $6,000 but that there would be an initial shakedown period during which autos would cost $10,000 to produce domestically.

a. Suppose that each firm that tries to produce autos must go through the shakedown period of high costs on its own. Under what circumstances would the existence of the initial high costs justify infant industry protection?

b. Now suppose, on the contrary, that once one firm has borne the costs of learning to produce autos at $6,000 each, other firms can imitate it and do the same. Explain how this can prevent development of a domestic industry and how infant industry protection can help.

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