1.

Suppose that the government of a small developing country believes that one of its manufacturing industries has the potential to become very successful and generate both employment opportunities and substantial export revenues in the future. The government believes, however, that due to the pressure of international competition, the industry struggles to reach sufficient scale to reach its full potential. It therefore considers imposing an import tariff on the industry's goods. a) What advice would you give to this government? To impose an import tariff on the industry goods is going to affect the export negatively; the owner of the export markets recourses will draw back. Instead of doing such a big change at once shouldnt it be better to try a smaller approach to help the industry to reach a sufficient scale, try to improve the efficiency. If that doesnt work you still can impose an import tariff, but if it works you have made it without disturbing the export growth. It can also result in poorer quality in the industries products. b) What questions would you ask the government if they asked you to make the decision? Is it so important to motivate the domestic market to lower the grow rate of exports? Does the increase in employment correspond to the growth rate fall in exports? If we impose the tariff will the export growth in the long run from this change cover the losses we have had in exports because of the change?

2. Explain how international trade can lead to the existence of "pollution havens". What policy instruments exist to prevent this outcome?

Because it is an economic activity that has strict regulations in some countries but not in all, the handling and recycling of these goods therefore often goes to the ones with fewer restrictions. This is sad because it leaves marks on the surroundings and nature. Greenpeace made a cause demanding to get stricter restrictions in Alang in india were they recycled old boats on a beach without any restrictions. The land with the initial problem could infuse carbon tariffs to avoid the pollution to get to other countries with fewer restrictions. The firms can therefore buy the right amount of pollution permits for the firms pollution.

3. A country currently imports automobiles at SEK 120,000 each. Its government believes that, given time, domestic producers could manufacture autos for only SEK 100,000 but that there would be an initial startup period during which autos would cost SEK 140,000 to produce domestically. a) Suppose that each firm that tries to produce autos must go through the startup period of high

costs on its own. Under what circumstances would the existence of the initial high costs justify infant industry protection?

If there is appropriability or you are in an imperfect capital market. If the country does not have financial institutions it is hard to make financial investments in new markets. Because of this the growth of new industries is limited by the profits of the other firms in the market. The low initial profits of the new firm will make it hard to get investments even if it will give a high return in the long run. In this situation it is best to try an better the capital market, the second best option is to protect the new industries that would allow them to faster growth. It would be justified if the cost for society was lower than the benefit that the future industry will give.

b) Now suppose, on the contrary, that once the firm has borne the costs of learning to produce autos at SEK 100,000 each, other firms can imitate it and do the same. Explain how this can prevent the development of a domestic industry and how infant industry protection can help. In some cases the gain for society will outweigh its costs; this will make it so that no other companies will enter the market. And therefore its best to try to compensate pioneers that has contributed, but you can also use tariffs and other encouraging entry polices to motivate companies to enter the market.