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Journal of Economic Integration 2003 March;18(1) :150-163.
DOI: https://doi.org/10.11130/jei.2003.18.1.150
Whether to Choose Tariffs or Subsidies to Protect a Domestic Industry
Dominik Egli and 
Frank Westermann 
Universität Bern
UCLA and CESifo
Copyright ©2003 Journal of Economic Integration
ABSTRACT
The use of tariffs in the absence of subsidies in small countries is an empirical observation which stands in sharp contrast to the theoretical literature of trade policy. We analyze the welfare effects of tariffs and subsidies in a homogeneous good duopoly game with cost asymmetries between the two firms, allowing for distortionary taxation. We find that for reasonable values of the distortion parameter or for a large cost disadvantage of the home firm, a tariff is the optimal policy tool.
Keywords: Strategic trade | Economies in transition | Cost asymmetries | Distortionary taxation
 
REFERENCE
1. Neary, J. Peter (1994), Cost Asymmetries in international Subsidy Games: Should Governments help Winners or Losers?, Journal of International Economics 37, 197218.
2. Cordella, Tito (1993), Trade Liberalization and oligopolistic Industries: A Welfare Appraisal, Recherches-Economiques-de-Louvain 59, 355-63.
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