Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility

James Markusen and Randall Wigle

Journal of Political Economy, 1989, vol. 97, issue 2, 368-86

Abstract: A theoretical analysis of "optimal" (Nash equilibrium) tariff rates is presented. A numerical general equilibrium model is then used to find Nash equilibrium tariff rates for the United States and Canada. The Nash equilibrium tariffs are small relative to partial equilibrium estimates: 18 percent for the United States and 6 percent for Canada. The United States is essentially indifferent between the Nash equilibrium and free trade, while Canada is better off at the latter by $4 billion. Empirical results support theoretical predictions that the optimal tariff is smaller when the country is smaller, there are scale economies and free entry, and capital is internationally mobile. Copyright 1989 by University of Chicago Press.

Date: 1989
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