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An Example Of Welfare Reducing Tariff Under Monopolistic Competition

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  • Partha Sen

    (Delhi School of Economics)

Abstract

We look at the effect of a tariff on the import of the brands of a differentiated good produced abroad by a small open economy. We show that in the presence of intra-industry trade if the elasticity of substitution between brands of the differentiated goods is higher than that between the differentiated good and the homogeneous good the imposition of a tariff lowers welfare. This happens because a tariff shifts demand towards the homogeneous good which can only be met by increased production at home. There is an exit out of the differentiated goods industry which reduces welfare.

Suggested Citation

  • Partha Sen, 1994. "An Example Of Welfare Reducing Tariff Under Monopolistic Competition," Working papers 07, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:07
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    References listed on IDEAS

    as
    1. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
    2. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
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