Optimal trade policy under homogeneous bertrand competition
Journal
Review of International Economics
Journal Volume
16
Journal Issue
5
Pages
1005-1009
Date Issued
2008
Author(s)
Abstract
Abstract In a seminal paper, Eaton and Grossman (1986) conclude that an export tax is optimal if firms produce heterogeneous products and engage in Bertrand price competition. In particular, they made a comment that could be interpreted to mean that even in the case of a homogeneous product, the optimal policy is still an export tax. This paper has re‐examined the case and found that the optimal export policy can be an export subsidy, free trade, or an export tax, depending on the marginal cost differential between the domestic and the foreign firms. Moreover, if government intervention entails a cost, free trade becomes the only optimal policy.
SDGs
Type
journal article