Partial Replacement of Protective Tariffs by Production Subsidies and Welfare

Yoshitomo Ogawa and Yoshiyasu Ono

The Economic Record, 2015, vol. 91, issue 294, 300-308

Abstract: type="main" xml:id="ecor12192-abs-0001">

Using a two-country framework, this paper examines the welfare effect of partially replacing a tariff with a production subsidy. It considers some plausible situations for industry protection, including where the initial tariff is higher than the optimal tariff, where a certain output of the protected commodity must be maintained, and where domestic production of the sector yields some externalities. In these cases it is shown that the partial replacement benefits the country. Properties of the optimal replacement are also explored.

Date: 2015
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