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| Author: | Lancaster, K. |
| Title: | The "product variety" case for protection |
| Journal: | Journal of International Economics
1991 : AUG, VOL. 31:1-2, p. 1-26 |
| Index terms: | PRODUCT DIFFERENTIATION PRODUCT FAILURES OPEN ECONOMY FREE TRADE TARIFFS ECONOMIES OF SCALE WELFARE LOSS |
| Language: | eng |
| Abstract: | To make an acceptable case for divergence from free trade requires proof of the existence of a potential for inherent market failure or distortion, followed by proof that this same failure or distortion can be fully corrected by an appropriate tariff, and that no other policy can do better. The existence of a case for protection is shown regarding a small open economy in which there is preference diversity and potential product differentiation with scale economies. The optimal tariff gives partial protection only, is a first-best solution, and must be sustained. The welfare loss that is corrected by the tariff is that due to a sub-optimal degree of product variety , arising from market failure linked to economies of scale. |
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