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The Case:

Pakistan’s Automobile industry is the thriving industrial sector and has significant contribution in country’s GDP and tax collection. Three major auto-manufacturers; Toyota, General Motors Honda and Suzuki are enjoying monopoly power in the local/domestic market. These companies setup their assembly plant in Pakistan. Domestic manufacturers are covering significant portion of consumers demand for cars. Despite of large volume of local production, the industry is still dependent on imports of various auto parts and components used for manufacturing. The country is also allowing the imports of used cars to meet large demand of consumers. In financial year 2015, government has raised tariff by 20 percent on imports of auto parts and all types of used imported cars. In the same period, domestic fuel prices fall drastically due to overall decrease of fuel prices in international market. Consider the data on only two categories of domestic and imported cars to analyze the situation. The prices of cars after and before tariff are given below.

 

Price before tariff 

Price after tariff

Toyota corolla (Domestic car 1300 cc)

19,00,000

20,00000

Suzuki Mehran (Domestic car 800cc)

6,00,000

6,10,000

Imported car (1300 cc)

1700,000

20,40,000

Imported car (800 cc)

5,50,000

6,60,000

 

Requirement:

Keeping in mind the given situation, logically discuss any two reasons for rise in prices of domestic cars.

 

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You may notice that when we analyze tariffs and quotas we are applying microeconomic tools, looking only at markets in individual goods and not at the big picture of overall trading patterns.  This is because in order to focus in on a few questions we have to make tons of simplifying assumptions.  One of those assumptions is the economist’s favorite ceteris paribus (“other things being equal”), which is the convenient assumption that we can look at changes in one market while assuming that everything else in our economy is not changing.

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