Reference no: EM132498114

Suppose a small country has decided to protect its import-competing domestic Industry Y from foreign competitors.

Rather than imposing an import tariff, if the country decides to provide a domestic production subsidy to all domestic producers of Good Y (an equally identical protection), would it cost the country less?

In other words, if import tariff allows the domestic producers of Y to raise their domestic price by $10 and increase production by 100 units, would it be better to give them a domestic production subsidy (and not impose any import tariff) that also allows the domestic Y industry to raise their domestic subsidy-inclusive price by $10 and increase production by 100 units?

Briefly explain which is a better policy to protect the Y industry: import tariff or production subsidy. Which policy is politically feasible?