Cost of Protection: A Second Look at the Romer Variety Effect
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The welfare loss calculated by Romer (J Dev Econ 43:5-38, 1994) under the assumption that certain import varieties disappear a result of increased protection are an order of magnitude larger than those obtained by any other investigator. In this paper, we will argue that the key source of Romer’s result is the total absence of domestic varieties of the differentiated product. Once we allow the differentiated product to be produces at home, the results change dramatically. This allows for the realistic possibility that domestic production substitutes for imports once tariffs are imposed.
KeywordsCost of protection Deadweight loss Extensive margin of trade
The authors would like to gratefully acknowledge comments of an anonymous referee. All errors are our own.
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