Cambridge O Level Economics: Methods, reasons and consequences of protection (2281)

This guide teaches sections 6.2.4 to 6.2.6 of the Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2: methods of protection, reasons for protection, and the consequences of protection. The syllabus has no tiers, so all of it applies to every candidate. Every country, firm, market and number below is invented for practice and is not a real statistic.

Related pages: the revision notes, the practice questions, the international trade practice set, the Cambridge O Level Economics hub, the printable checklist and the free diagnostics.

What you must be able to do

Section	Syllabus topic	You must be able to
6.2.4	Methods of protection: tariffs, import quotas, subsidies and embargoes	Define each method and show how it works, including its effect on price and quantity
6.2.5	Reasons for protection, including infant industry, declining industry, strategic industry and avoidance of dumping	Explain each reason and judge when it is convincing
6.2.6	Consequences of protection: effectiveness, and the impact on the home country and its trading partners	Weigh gains and losses for consumers, producers, government and other countries

Protection is any government step that helps home producers compete against foreign sellers. It is the opposite of free trade. Free trade and the definition of globalisation belong to other parts of section 6.2 and are not repeated here.

6.2.4 Methods of protection

The running example is an illustrative market for chairs in Country P. A chair on the world market costs 80. Buyers and home sellers respond to price as in this table.

Price	Quantity demanded	Home output	Imports needed
80 (free trade)	940	100	840
95	835	145	690
100	800	160	640
164	352	352	0

In words: the demand curve slopes downward and the home supply curve slopes upward. The world price is a horizontal line at 80. Where it meets demand, buyers want 940, and where it meets home supply, firms make 100. The gap is imports.

Tariffs

A tariff is a tax charged on goods when they enter the country. A specific tariff charges a set amount on each unit. An ad valorem tariff charges a share of the value.

Worked example 1. Country P charges a specific tariff of 20 per chair, which is 25% of the world price.

Home price           = 80 + 20 = 100      (a rise of 25%)
Quantity demanded    = 800   (from 940, a fall of 14.9%)
Home output          = 160   (from 100, a rise of 60%)
Imports              = 800 - 160 = 640    (from 840, a fall of 23.8%)
Tariff revenue       = 20 x 640 = 12,800

The tariff cuts imports, lifts home sales and raises money for the government. Buyers pay more and buy fewer chairs. A 20% ad valorem tariff on a 150 import would add 0.20 x 150 = 30.

Import quotas

An import quota is a ceiling on units brought in during a year. If Country P allows only 640 chairs, the market clears where demand minus home output equals 640. That is again a home price of 100.

The result matches the tariff, but the 20 per chair goes to whoever holds the import licences. If foreign sellers hold them, 12,800 leaves the country. If the government auctions the licences, it collects the money instead.

Subsidies

A subsidy is a sum paid by the government to producers for each unit made. Suppose Country P pays home chair makers 15 per chair. Firms now act as if the price were 95, but buyers still pay 80.

Home output          = 145   (from 100)
Quantity demanded    = 940   (price unchanged)
Imports              = 940 - 145 = 795   (from 840)
Cost to government   = 15 x 145 = 2,175

Consumers are not hurt by higher prices. Taxpayers fund the policy, and imports fall by less than under the tariff.

Embargoes

An embargo stops trade completely, in one good or with one country. If Country P bans chair imports, only home output is left. The price rises to 164, a rise of 105%, and quantity falls to 352. An embargo is also used for political or safety reasons, and it is the most severe method.

Comparing the four methods

Method	Price to home buyers	Who gets the money	Imports
Tariff	Rises	Government	Fall
Quota	Rises	Licence holders (or government if it sells licences)	Capped
Subsidy	Unchanged	Home producers receive it, taxpayers fund it	Fall slightly
Embargo	Rises most	Home producers	Stop

6.2.5 Reasons for protection

Infant industry. A new industry makes little, so its cost per unit is high. As output grows, average cost falls (economies of scale). Protection buys time to reach that scale.

Worked example 2. A new bottling plant in Country P (illustrative) has these costs. Imported bottles sell at 60.

Output	Total cost	Average cost
1,000	80,000	80
2,000	126,000	63
3,000	177,000	59
4,000	232,000	58

The plant loses to imports at 1,000 and 2,000 units. At 3,000 units its cost of 59 is below 60. Protection is therefore justified until about 3,000 units. The risk is that a plant shielded for years has little reason to cut costs.

Declining industry. When demand for an industry’s product falls for good, many workers in one place may lose jobs. Protection slows the fall and gives time to retrain and find new work. It is weak if the industry has no future, because it only delays change and keeps resources in poor use.

Strategic industry. Some industries matter for security or basic needs, such as food, energy and defence. A government may protect them so that a war, a dispute or a shortage abroad cannot cut off supply.

Avoidance of dumping. Dumping is selling in another country for less than the goods cost to make, or for less than the seller charges at home. It can force rivals out, after which the seller may raise prices.

Worked example 3. A foreign glass maker sells at 38 in Country P but charges 52 at home. Its cost is 45. A tariff of 52 - 38 = 14 lifts the import price to its home price. Buyers gain from the 38 price in the short run, but home glass makers may close.

6.2.6 Consequences of protection

Effectiveness. A policy is effective if it reaches its aim at a reasonable cost. A tariff cuts imports more when demand for imports is elastic. If demand is inelastic, imports hardly fall, though revenue is high.

Worked example 4. A tariff raises the import price from 40 to 44, a rise of 10%. Imports fall from 2,000 to 1,900, a fall of 5%.

Elasticity of demand = -5 / 10 = -0.5   (inelastic)
Revenue = 4 x 1,900 = 7,600

The tariff barely protects home firms. If imports had fallen to 1,400 (a fall of 30%), elasticity would be -3.0 and revenue 4 x 1,400 = 5,600, but home firms would gain far more.

Home country, using Example 1.

• Consumers lose 17,400 of surplus: they pay more and buy fewer chairs.
• Home producers gain 2,600.
• The government gains 12,800.
• The country loses 2,000 overall, since 17,400 - 2,600 - 12,800 = 2,000. Some output now comes from firms with higher costs than the world price.
• Firms that use chairs, such as cafes, face higher costs.

Trading partners.

• Exporters sell less. If Country R sold 840 chairs at 80 (67,200) and now sells 640 (51,200), its export revenue falls by 16,000, or 23.8%.
• Jobs may be lost in its chair industry.
• Country R may retaliate with its own tariffs, so both sides lose sales.

Evaluation chain. Tariff, so dearer imports, so buyers lose real income, so poorer households lose most. Then judge: how long will it last, how elastic is demand, will partners retaliate, and what does each job saved cost? In Example 1, suppose the extra 60 chairs need 10 workers. Buyers lose 17,400, which is 1,740 per job. After counting the producers’ gain and the revenue, the net loss is 2,000, or 200 per job.

Common errors

• Saying a quota raises government revenue. It only does so if licences are sold.
• Describing a subsidy as a tax on imports.
• Writing that dumping means any cheap import. It means selling below cost or below the home price.
• Forgetting that protection hurts consumers while helping producers.
• Taking the new figure rather than the old one as the base for a percentage.
• Giving only gains or only losses in an evaluation.

Test yourself with the practice questions and condense the unit with the revision notes.

Official syllabus

Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 6.2.4 Methods of protection, 6.2.5 Reasons for protection and 6.2.6 Consequences of protection.