Suppose that the government follows a policy of infant-industry protection, allowing the domestic production of automobiles in an economy sheltered by tariffs on car imports.

(a) Discuss the critical features of a policy that aims to generate efficiency and international competitiveness in the car industry. Pay particular attention to the termination date of the policy.

(b) Now examine the government’s incentives to remove the protectionist policy if the car industry does not make any progress. Explain why these incentives are crucial to the success of the original policy. Discuss different factors that might bear on these incentives (see the game theory appendix for more a more formal description of these issues).