Tariffs and Welfare in a Dynamic Differentiated Oligopoly
Using a dynamic general-equilibrium environment with strategically interacting oligopolists, this paper demonstrates that dynamic elements will significantly alter the equilibrium effects of tariff policy. In particular, the tariff rate which maximizes aggregate steady state welfare is decreasing in the level of adjustment costs. Furthermore, when tariff rates change, there are short-run welfare losses along the dynamic transition path to the new steady state. Gradual implementation of policy can avoid these losses. This provides a justification for the gradual implementation of tariff reductions in the GATT rounds or in the Free Trade Agreement between Canada and the United States. Copyright 1995 by Blackwell Publishing Ltd.
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Volume (Year): 3 (1995)
Issue (Month): 1 (February)
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