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Protectionism and Increasing Returns with Comparative-Cost Disadvantage

Roy Ruffin () and Wilfred John Ethier ()
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Roy Ruffin: Department of Economics, University of Houston

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We reconsider the economics of protection with an industry subject to increasing returns. Under strong comparative disadvantage in one country, any tariff-distorted equilibrium in which both countries produce the commodity must be unstable.In general, under strong comparative disadvantage, the case for free trade is greater than without increasing returns. Also, exceptionally high tariffs are required to protect a high cost increasing-returns industry. Beneficial tariffs or subsidies for the country with comparative disadvantage become prominent when the country with a comparative advantage faces a relevant capacity constraint.

Keywords: increasing returns; protection; comparative-cost disadvantage; flexible capacity (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2011-07-01
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