DP345 Trade Liberalization and Shadow Prices in the Presence of Tariffs and Quotas

Author(s):	J Peter Neary
Publication Date:	November 1989
Keyword(s):	Immiserizing Growth, Piecemeal Policy Reform, Quotas, Shadow Prices, Tariffs, Trade Liberalization
JEL(s):	410, 422
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=345

This paper examines the welfare effects of partial trade liberalization when trade is restricted by tariffs, quotas or some combination of both instruments. Rules for optimal first- and second-best intervention are derived and illustrated (using a new geometric technique) in both small and large open economies. A general expression for shadow prices of factors of production, which applies in both small and large economies, with or without quotas, is also derived. Welfare paradoxes are possible whenever exogenous changes raise (lower) imports of goods subject to trade restrictions which are below (above) optimal levels.