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Open Economies Review

, Volume 22, Issue 3, pp 463–477 | Cite as

Cost of Protection: A Second Look at the Romer Variety Effect

  • Purba Mukerji
  • Arvind Panagariya
Research Article
  • 74 Downloads

Abstract

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.

Keywords

Cost of protection Deadweight loss Extensive margin of trade 

JEL Classification

F12 

Notes

Acknowledgments

The authors would like to gratefully acknowledge comments of an anonymous referee. All errors are our own.

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Connecticut CollegeNew LondonUSA
  2. 2.Columbia UniversityNew YorkUSA

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