In what way are subsidies similar to tariffs in their effect on domestic markets?

• A. Both are forms of taxes imposed on domestic producers.
• B. Both reduce government spending by supporting domestic industries.
• C. Both increase the competitiveness of domestic producers against foreign producers.
• D. Both directly increase the price of imported goods for consumers.

Answer: (C)

Verified step by step guidance

1. Understand the purpose of tariffs and subsidies: Tariffs are taxes imposed on imported goods, making them more expensive and less competitive compared to domestic products. Subsidies are financial supports given to domestic producers to lower their production costs, making their goods cheaper and more competitive.
2. Analyze the effect of tariffs: Since tariffs increase the price of imported goods, domestic consumers are more likely to buy domestic products, which increases the competitiveness of domestic producers.
3. Analyze the effect of subsidies: Subsidies reduce the cost for domestic producers, allowing them to sell at lower prices or increase profits, which also enhances their competitiveness against foreign producers.
4. Compare the effects: Both tariffs and subsidies improve the position of domestic producers relative to foreign competitors, either by making imports more expensive (tariffs) or domestic goods cheaper (subsidies).
5. Conclude that the similarity lies in their impact on competitiveness, not in being taxes or reducing government spending, nor necessarily in directly increasing import prices for consumers in the case of subsidies.