In competitive markets a small open economy cannot improve its terms of trade by levying a tariff. With imperfectly competitive suppliers, such a country might be able to get better prices if its market is segmented from that in other countries. The paper points out that tariffs provide the kind of market segmentation required. The advisability of protection for a small country is shown to rest upon the asymmetry between its demand elasticity and the elasticity of demand on average in the market.
ASJC Scopus subject areas
- Economics and Econometrics