Protectionism and Increasing Returns with Comparative-Cost Disadvantage
AbstractWe reconsider the economics of protection with an industry subject to increasing returns. Under strong comparative disadvantage in one country, any tariff-distorted equilibrium in which both countries produce the commodity must be unstable.In general, under strong comparative disadvantage, the case for free trade is greater than without increasing returns. Also, exceptionally high tariffs are required to protect a high cost increasing-returns industry. Beneficial tariffs or subsidies for the country with comparative disadvantage become prominent when the country with a comparative advantage faces a relevant capacity constraint.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-027.
Length: 30 pages
Date of creation: 01 Jul 2011
Date of revision:
increasing returns; protection; comparative-cost disadvantage; flexible capacity;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
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