Uniform Output Subsidies in an Economic Union with Firms Heterogeneity
AbstractIn this paper we show the importance of cost asymmetry and demand curvature in the effect of a uniform output subsidy policy in an economic union. We consider an economic union formed by two countries each with a single firm producing a homogeneous good. We find that when firms have different cost, the optimal level of the uniform subsidy can be negative if the demand is concave enough. The low cost firm expands its market share if the demand function is sufficiently convex whereas in the case of a concave demand function it is the higher cost firm which gains market share. This implies that a uniform output subsidy policy may cause a change in production eÂ¢ciency. Finally, we consider how a divergence between private and social costs of public funds may aÂ¤ect the desirability of such a subsidy policy.
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Bibliographic InfoPaper provided by FEDEA in its series Working Papers on International Economics and Finance with number 00-06.
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- Bernardo Moreno & José L. Torres, 2000. "Uniform Output Subsidies In An Economic Union With Firms Heterogeneity," Working Papers 00-06, Asociación Española de Economía y Finanzas Internacionales.
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- NEP-ALL-2001-05-16 (All new papers)
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