Domestic Entry, International Trade Cost Reduction and Welfare

29 Pages Posted: 17 Nov 2010

See all articles by Sugata Marjit

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta; Indian Institute of Foreign Trade; City University of Hong Kong (CityU) - Department of Economics & Finance

Arijit Mukherjee

University of Nottingham - School of Economics

Date Written: November 15, 2010

Abstract

We show the welfare effects of international trade cost reduction under endogenous domestic market structure. If the domestic labour market is competitive, there is no integer constraint and the trade cost represents transportation cost, a reduction in the transportation cost does not affect (may reduce) domestic welfare if the products are perfect (imperfect) substitutes. If the trade cost represents tariff, domestic welfare is higher under a positive non-prohibitive tariff compared to both free trade and no trade. In the presence of an integer constraint, a lower transportation cost may reduce consumer surplus and increase the profits of the active domestic firms and domestic welfare, even if the products are homogeneous. If there is no integer (integer) constraint and the products are perfect substitutes, transportation cost reduction reduces (may increase) domestic welfare in the presence of a domestic labour union. We also show that entry for the domestic country may be socially excessive or insufficient under a competitive domestic labour market, while it is always socially insufficient in the presence of a domestic labour union.

Keywords: Free entry, Transportation cost, Tariff, Labour union, Welfare

JEL Classification: F12, L13, L40

Suggested Citation

Marjit, Sugata and Marjit, Sugata and Mukherjee, Arijit, Domestic Entry, International Trade Cost Reduction and Welfare (November 15, 2010). Available at SSRN: https://ssrn.com/abstract=1709336 or http://dx.doi.org/10.2139/ssrn.1709336

Sugata Marjit

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India

Indian Institute of Foreign Trade ( email )

New Delhi
QUTUB INSTITUTIONAL AREA
NEW DELHI, 110016
India

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Arijit Mukherjee (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 9514733 (Phone)
+44 115 9514159 (Fax)

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