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Import Tariffs, Quality Investment And Welfare

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  • Roberto Hernan

    ()

  • Praveen Kujal

    ()

Abstract

In this paper we study incentives for a government to impose a discriminatory or uniform import tariff on its low and high quality imports. In comparison to free trade both tariffs decrease total welfare. In response to any tariff, firms decrease quality investment and total output sold declines. The degree of product differentiation under both the tariffs increases. Consumer surplus declines by a greater amount than the increase in revenues under an import tariff. While the uniform tariff works to the advantage of the high quality firm, the discriminative tariff works to the advantage of the low quality firm. Total welfare, though lower than under free trade, is greater under a uniform than under a discriminatory tariff.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we056116.

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Date of creation: Nov 2005
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Handle: RePEc:cte:werepe:we056116

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  1. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, Econometric Society, vol. 51(5), pages 1469-83, September.
  2. James A. Brander & Barbara J. Spencer, 1983. "Trade Warfare: Tariffs and Cartels," NBER Working Papers 1193, National Bureau of Economic Research, Inc.
  3. Herguera, Inigo & Kujal, Praveen & Petrakis, Emmanuel, 2002. "Tariffs, quality reversals and exit in vertically differentiated industries," Journal of International Economics, Elsevier, Elsevier, vol. 58(2), pages 467-492, December.
  4. Greenaway, David & Hine, Robert C & Milner, Chris, 1995. "Vertical and Horizontal Intra-industry Trade: A Cross Industry Analysis for the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(433), pages 1505-18, November.
  5. Feenstra, Robert C, 1988. "Quality Change under Trade Restraints in Japanese Autos," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(1), pages 131-46, February.
  6. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  7. Anderton, Bob, 1999. "Innovation, Product Quality, Variety, and Trade Performance: An Empirical Analysis of Germany and the UK," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 152-67, January.
  8. José Luis Moraga Gonzales & Jean-Marie Viaene, 2001. "Procompetitive Trade Policies," CESifo Working Paper Series 597, CESifo Group Munich.
  9. Gatsios, Konstantine, 1990. "Preferential tariffs and the 'most favoured nation' principle: A note," Journal of International Economics, Elsevier, Elsevier, vol. 28(3-4), pages 365-373, May.
  10. Dongsheng Zhou & Barbara J. Spencer & Ilan Vertinsky, 2000. "Strategic Trade Policy with Endogenous Choice of Quality and Asymmetric Costs," NBER Working Papers 7536, National Bureau of Economic Research, Inc.
  11. Herguera, Inigo & Kujal, Praveen & Petrakis, Emmanuel, 2000. "Quantity restrictions and endogenous quality choice," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 18(8), pages 1259-1277, December.
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