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Whether to Choose Tariffs or Subsidies to Protect a Domestic Industry

Author

Listed:
  • Westermann, Frank

    (UCLA and CESifo)

  • Westermann, Frank

    (UCLA and CESifo)

Abstract

The use of tariffs in the absence of subsidies in small countries is an empirical observation which stands in sharp contrast to the theoretical literature of trade policy. We analyze the welfare effects of tariffs and subsidies in a homogeneous good duopoly game with cost asymmetries between the two firms, allowing for distortionary taxation. We find that for reasonable values of the distortion parameter or for a large cost disadvantage of the home firm, a tariff is the optimal policy tool.

Suggested Citation

  • Westermann, Frank & Westermann, Frank, 2003. "Whether to Choose Tariffs or Subsidies to Protect a Domestic Industry," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 18, pages 150-163.
    • Handle: RePEc:ris:integr:0229
    as

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    More about this item

    Keywords

    Strategic trade; Economies in transition; Cost asymmetries; Distortionary taxation;
    All these keywords.

    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
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General

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