Infant Industry Protection In the situation today (panel a), the industry would produce S₁, the quantity at which MC = P^W. Because P^W is less than average costs at S₁, the industry would incur losses at the world price of P^W and would be forced to shut down. A tariff increases the price from P^W to P^W + t, allowing the industry to produce at S₂ (and survive) with the net loss in welfare of (b + d). In panel (b), producing today allows the average cost curve to fall through learning to AC′. In the future, the firm can produce the quantity S₃ at the price P^W without tariff protection and earn producer surplus of e.