Tariff Protection, Imperfect Competition, and Time Consistency
In the standard perfectly competitive model, an import (export) subsidy never constitutes an optimal trade policy for a large country. Yet, in their influential papers (1984a, 1984b) Brander and Spencer showed that an import subsidy could be the best policy to use in the presence of a foreign monopoly. This chapter shows that when production decisions are irreversible, and there is no precommitted trade policy, the conventional outcome of an optimal tariff reappears even in the presence of a foreign monopoly.1
KeywordsTrade Policy Indifference Curve Tariff Rate Domestic Economy Production Decision
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