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Uniform Output Subsidies in an Economic Union with Firms Heterogeneity

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  • Bernardo Moreno
  • José L. Torres

Abstract

In 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 e¢ciency. Finally, we consider how a divergence between private and social costs of public funds may a¤ect the desirability of such a subsidy policy.

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Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 00-06.

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Handle: RePEc:fda:fdadef:00-06

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  1. David de Meza, 1986. "Export Subsidies and High Productivity: Cause or Effect?," Canadian Journal of Economics, Canadian Economics Association, vol. 19(2), pages 347-50, May.
  2. Lee, Sanghack, 1990. "International equity markets and trade policy," Journal of International Economics, Elsevier, vol. 29(1-2), pages 173-184, August.
  3. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  4. Ngo, Van Long & Soubeyran, Antoine, 1997. "Cost heterogeneity, industry concentration and strategic trade policies," Journal of International Economics, Elsevier, vol. 43(1-2), pages 207-220, August.
  5. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  6. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November.
  7. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  8. Dick, Andrew R., 1993. "Strategic trade policy and welfare : The empirical consequences of cross-ownership," Journal of International Economics, Elsevier, vol. 35(3-4), pages 227-249, November.
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