Constrained Optimal Trade Policy for Imperfectly Competitive Industries
Much of the literature on trade policy under oligopoly is concerned with establishing the welfare effects of small changes in some particular policy instrument, such as export subsidies or import tariffs. The welfare effects of these instruments are derived from their effects on the economy’s terms of trade, and on the scale of operation of ‘distorted’ domestic activities. Typically the literature makes little attempt to distinguish whether a policy is changing welfare through the terms of trade or through distortions. Furthermore, there has been little exploration of the interaction between different policy instruments. For example, how is the case for trade policy altered if other policy instruments are being used to manage domestic distortions? This approach is in marked contrast to the theory of policy developed for perfectly competitive economies. Here the method is to isolate the effects of policy on terms of trade and on distortions, and consequently to derive a theory of policy targeting. Trade policy should be used to manipulate the terms of trade and other instruments used to counter domestic distortion.
KeywordsTrade Policy Consumer Surplus Government Revenue Composite Sector Export Subsidy
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