Assessment Task 2
Question:
There are two main ways to protect a domestic industry: (1) Subsidise production and (2) Place a tariff on imports of similar goods. Compare and contrast the economic welfare effects of such industry assistance measures. In the light of these welfare effects, can a sound economic case be made for continuing to protect the Australian car industry?
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Tutor: Augustine Conteh
Date due: Week 11 Monday 5pm
Word count: 1399
The Australian automotive industry is fundamental within the manufacturing industry. As a viable domestic producer, the automotive industry is a vital source of employment and economic research and development. However, with the accessibility and low cost of imports and the stability of the Australian dollar, the automotive industry has suffered major cutbacks that are presently being tended to through government intervention policies such as the Automotive Transformation Scheme. To maintain international and domestic competition, the Australian government delivers production subsidies and import tariffs to the automotive industry. Due to this ‘band-aid’ solution, the long-term effects are being overlooked. Subsidies and tariffs solve a short-term problem but are damaging to the long-term solution creating significant and extensive harm to consumer and producer surplus. Therefore, a sound economic case cannot be successfully made to continue to protect the Australian automotive industry.
Market equilibrium occurs when supply and demand for goods or services are in sync (Mankiw 2012). A ‘deadweight loss’ occurs when supply and demand for goods or services are not in equilibrium; there is a surplus or a shortage in supply (Frank & Bernanke 2004). A deadweight loss is considered a market failure, or inefficiency; this comes at a cost to society due to inefficient allocation of resources (Doyle 2005: 225). Mankiw and Taylor state that subsidies and