Trade policy with heterogeneous traders: do quotas get a bum rap?, Issue 13040
International Monetary Fund, 2007 - Business & Economics - 38 pages
This paper considers the effects of trade policy--tariffs and quotas--when importing is done by competitive traders who are identical ex ante but differ ex post. We show that the standard equivalence results no longer hold and the conventional ranking of tariffs and quotas is turned on its head: quotas are not as bad for welfare as previously believed, while tariffs may restrict trade by more than originally intended. Furthermore, the allocation of property rights (quota licenses) has real effects beyond the distribution of rents; this, in turn, has implications for the effects of corruption on welfare.
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Trade Policy with Heterogeneous Traders: Do Quotas Get a Bum Rap?
Kala Krishna,Ling Hui Tan
Limited preview - 2007
comes from total consumer surplus corruption decreasing depicted in Figure Differentiating Equation domestic agents domestic market EE line enter the market equality comes equilibrium and impose Equilibrium entry equilibrium level equilibrium welfare equivalent specific tariff exit of traders expected quasi rent falls fixed cost free entry condition free trade equilibrium free trade level given Q Hence import equivalent specific increasing in Q initially import equivalent intersection J F(c)dc-fe Lemma less entry costs level of entry level of imports license price licenses are given licenses are sold market clearing mass of traders monopolistically competitive Nq Q number of traders perfect competition PF NF PF(N post-tariff supply producer surplus QD(P)dP QQ line quota is close quota level quota licenses quota Q quota rents rearranging terms rent per trader rent-seeking second from rearranging square-bracketed term supply curve term is zero total quasi rent trade policy valorem tariff world market