Question

Suppose that Egypt decides to become self-sufficient in citrus fruits and even to export them. In order to accomplish this, large tax incentives are granted to companies that will invest in citrus fruits production. As a result, the Egyptian industry becomes competitive and able to sell fruits at the lowest price. Does Egypt have a comparative advantage? Why, or why not? What are the consequences for the overall economy? (hint: Answer this question theoretically. Do not use graphs or numbers in your answer. Your answer should not exceed 8 lines).

Answer 1

Comparative advantage occurs when a country produce goods at lower opportunity cost which means loss of not producing other good is less when we compare benefit of the good we are producing. If Egypt government provide tax incentive to produce citrus fruits, there will be reduction in cost of producing citrus fruits or there is rise in overall profit of producing citrus fruits. It will lower the opportunity cost of producing another goods which will give comparative advantage to citrus fruits against other countries. The major consequence would be that if government is giving tax incentives to produce citrus fruits, almost all producers would start producing this which will reduce production of other goods and you have might have to import other goods.