Strategic Trade Policy with Polynomial Costs

ÿWe investigate how the superiority of the optimal subsidy or tariff in an international Cournot oligopoly depends on the production technology used in the industry, an interesting issue that has not been analyzed in the literature. We establish that the welfare superiority of the optimal subsidy or tariff depends on the relative steepness of the firms’ common marginal cost curve: when it is relatively steep, tariffs are superior to subsidies in enhancing domestic welfare, and vice versa. When both instruments are used simultaneously, the tariff component becomes more important as the marginal cost curve steepens. I thank Debashis Pal and Wolfgang Pal for valuable help and discussion; all remaining errors are my own. Citation: White, Mark D., (2002) "Strategic Trade Policy with Polynomial Costs." Economics Bulletin, Vol. 6, No. 6 pp. 1−5 Submitted: November 18, 2002. Accepted: November 19, 2002. URL: http://www.economicsbulletin.com/2002/volume6/EB−02F10006A.pdf