Suppose a recent study shows that in Country A, consumers pay an average of about $169,000 per job per year maintained by import protection. Given that these employees earned much less than $169,000 per year, it would be much cheaper to simply pay these workers not to work and impose no import restrictions. Why do you think that, in spite of the fact that there is a net loss in national well-being, the government of Country A has maintained these barriers?

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: The findings of the study are consistent with the idea that the cost of protection often exceeds the benefit, and overall a country loses from import restrictions. Among the losers are the final consumers, and among the gainers are the firms and the workers in the protected industries. Import restrictions are often imposed by politicians under pressure from lobbying groups. Producer groups are more effective than consumer groups when it comes to political lobbying. The producer groups are small, concentrated groups which can better solve the free-rider problem. Consumer groups, in contrast, are large, anonymous, and dispersed groups that are unable to effectively resolve the free-rider problem within the group. Therefore, politicians who are responsive to well-organized, import-competing producer groups are more likely to use restrictions to trade although it is not beneficial to the well-being of the country as a whole.