A country currently imports automobiles at $8,000 each. Its government believes

Question

A country currently imports automobiles at $8,000 each. Its government believes that,
given time, domestic producers could manufacture autos for only $6,000 but that
there would be an initial shakedown period during which autos would cost $10,000 to
produce domestically.
a. Suppose that each firm that tries to produce autos must go through the shakedown
period of high costs on its own. Under what circumstances would the existence of
the initial high costs justify infant industry protection?
b. Now suppose, on the contrary, that once one firm has borne the costs of learning to
produce autos at $6,000 each, other firms can imitate it and do the same. Explain
how this can prevent development of a domestic industry and how infant industry
protection can help.

Explanation / Answer

a.In a socilistic kind of government , all the industrial entities are equally supported by the state for R&D , so that all participate in the pursuit of low cost car and in the shortest possible time at least one entity comes out with an implementable idea. This idea is then shared to all the entities for replication. The benefit of this idea is passed on to the people of the country.

b.In a capitalist kind of state , individual entity spends huge amount of money in the innovation or R&D to create a low cost car. This entity would like to recover such cost by selling more quantity in the market. However, if others are allowed to imitate , no investor would like to invest in R&D. Therefore a kind of patent protection should be given to such entity and others should be legally barred to imitate for a particular period of time.

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