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A welfare analysis of tariffs and equivalent quotas under demand uncertainty: Implications for tariffication

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  • Chen, Hung-Yi
  • Chang, Yang-Ming
  • Chiou, Jiunn-Rong

Abstract

Under market demand uncertainty, we show that quotas can result in a welfare advantage over tariffs for an importing country despite that its government does not capture any quota rents. Specifically, the conditions under which an equivalent quota yields higher expected welfare than a tariff are shown to depend on a set of economic variables. These variables include the initial tariff rate, the relative efficiency in production between home and foreign firms, the probability distribution of random demand shocks that make the quota binding or non-binding under uncertainty, as well as the variance of the stochastic market demand. The analysis of this paper has welfare implications for tariffication.

Suggested Citation

  • Chen, Hung-Yi & Chang, Yang-Ming & Chiou, Jiunn-Rong, 2011. "A welfare analysis of tariffs and equivalent quotas under demand uncertainty: Implications for tariffication," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 549-561, October.
    • Handle: RePEc:eee:reveco:v:20:y:2011:i:4:p:549-561
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    Cited by:

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    3. James Lake & Maia K. Linask, 2013. "The near-equivalence of tariffs and quotas," Departmental Working Papers 1305, Southern Methodist University, Department of Economics.
    4. Feng, Pingping & Zhou, Xiaoyang & Zhang, Ding & Chen, Zhaobo & Wang, Shouyang, 2022. "The impact of trade policy on global supply chain network equilibrium: A new perspective of product-market chain competition," Omega, Elsevier, vol. 109(C).

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