AN EXAMPLE OF WELFARE REDUCING TARIFF UNDER MONOPOLISTIC COMPETITION

Partha Sen
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Partha Sen: Delhi School of Economics

No 7, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: We look at the effect of a tariff on the import of the brands of a differentiated good produced abroad by a small open economy. We show that in the presence of intra-industry trade if the elasticity of substitution between brands of the differentiated goods is higher than that between the differentiated good and the homogeneous good the imposition of a tariff lowers welfare. This happens because a tariff shifts demand towards the homogeneous good which can only be met by increased production at home. There is an exit out of the differentiated goods industry which reduces welfare.

Pages: 12 pages
Date: 1994-05
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