Protectionism and Increasing Returns with Comparative-Cost Disadvantage
Roy Ruffin () and
Wilfred 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
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)
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Persistent link: http://EconPapers.repec.org/RePEc:pen:papers:11-027
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