Question

suppose the government of all small country in the specific factors model wants to ensure that all households in their country gain from trade, they should tax some household and will always have to transfer some of those tax revenues to households that own:

1. the non-specific factor

2. the factor specific to the exporting industry

3. the factor specific to the import-competing industry or the non-specific factor

4. either the factor specific to the import-competing industry or the non-specific factor.

5. the non-specific factor

Please explain

Answer 1

Option 3 is correct. Because the small nation imposes taxes on importing commodity. Tax will transfer to the households that they use imported commodities. Then small nation implements import substitution industrialisation reduce imports and promote domestic industries to produce import competing commodities. Thus, the government transfer those tax revenues to house holds that own the factor specific to the import competing industry or thr non specific factor. Before tax, government would promote exporting industries and transfer revenues to these sector. But after tax by import substitution policy government encourage the production of import - competing industries by transfering tax revenues providing tax incentives etc. Specific factor might be capital input and non specific factor might be labour input. It may increase the income of both inputs