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Price and Quantity Policies in a Simple Political Economy Framework

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  • Gulati Sumeet

    () (University of British Columbia)

Abstract

The literature of the second-best demonstrated the difference between exogenous price and quantity distortions. However, it is not always realistic to assume that distortions are beyond the policy makers control. Are price and quantity distortions different even if they are endogenized using a political economy setting? In this paper, I postulate a government that uses trade and pollution policy to maximize a weighted welfare function where domestic producers get a higher weight than consumers. International trade is regulated by either a tariff or a quota, and pollution is regulated using a pollution tax. I find that if the government has full control on both trade and pollution policy, endogenously created quantitative distortions (quantitative restrictions) have the same effect as price distortions (tariffs).

Suggested Citation

  • Gulati Sumeet, 2010. "Price and Quantity Policies in a Simple Political Economy Framework," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-16, October.
  • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:99
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    References listed on IDEAS

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    1. Schleich, Joachim & Orden, David, 2000. "Environmental Quality and Industry Protection with Noncooperative versus Cooperative Domestic and Trade Policies," Review of International Economics, Wiley Blackwell, vol. 8(4), pages 681-697, November.
    2. Copeland Brian R., 1994. "International Trade and the Environment: Policy Reform in a Polluted Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 44-65, January.
    3. Sumeet Gulati, 2008. "Free trade and the burden of domestic policy," Canadian Journal of Economics, Canadian Economics Association, vol. 41(3), pages 817-837, August.
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