Question

How does protectionism affect the price of the protected good in the domestic market?

Short answer

Protectionism measures, like tariffs and quotas, directly impact the price of protected goods in the domestic market. Tariffs increase the price of imported goods, making them less competitive, while quotas limit the availability of imports, leading to higher prices. Consequently, domestic consumers are more likely to purchase the more expensive, protected domestic goods, thus raising their prices in the market.

Step-by-step solution

Identify the protectionist measures

There are several protectionist measures available to governments, such as tariffs, quotas, subsidies, and non-tariff barriers. In this question, we will focus on tariffs and quotas since they have direct effects on the price of the protected good in the domestic market.

Understand the effects of tariffs on the price of the protected good

A tariff is a tax imposed on imported goods. When a country imposes a tariff on a particular good, the price of that good increases, making it more expensive for domestic consumers to buy. The higher price discourages imports and encourages domestic production. The following formula illustrates the effect of a tariff on the price of the protected good: New price of the protected good = Original price of the good + Tariff amount

Analyze the effects of quotas on the price of the protected good

A quota is a restriction on the quantity of a good that can be imported. In this case, the government sets a limit on the number of units that can be imported, which directly affects the supply of the good. When the supply of the good decreases, the price of the good increases due to the limited availability of the imported good. Consequently, domestic consumers are more likely to buy the protected domestic goods.

Illustrate how protectionism leads to higher prices for the protected good

Both tariffs and quotas can result in higher prices for the protected good in the domestic market. Tariffs increase the price of imported goods, making them less competitive with domestic products. Quotas reduce the supply of imported goods, causing their prices to increase due to limited availability. In both cases, domestic consumers are more likely to purchase the more expensive, protected domestic goods over the imported goods.

Conclusion: The effects of protectionism on domestic prices

Protectionism measures, such as tariffs and quotas, have a direct impact on the price of the protected goods in the domestic market. Tariffs increase the price of imported goods, making them less competitive with domestic products, whereas quotas reduce the supply of imported goods, leading to higher prices due to limited availability. As a result, domestic consumers are more inclined to buy the protected domestic goods, which also experience higher prices due to the protection.