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Tariffs and Firm-Level Heterogeneous Fixed Export Costs

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This paper presents a two country intra-industry trade model with bilateral ad valorem tariffs and fixed export costs that are heterogeneous across firms. In this model not all firms will choose to export. We examine the effects of reciprocal changes in the tariff and the fixed export barrier on the number of firms, firm profits, tariff revenue and consumer welfare. We show that both types of trade barriers reduce (increase) the number of exporting (pure domestic) firms. However, the sum of available home and foreign varieties may actually increase for small tariffs. Firm profits fall for both the tariff and the fixed export barrier. Tariff revenue falls for an increase in fixed exporting costs whereas we have a Laffer curve effect for the tariff. Finally, we establish that welfare falls with fixed export costs and large tariffs but increases for small tariffs, i.e. there exist a welfare maximizing tariff.
Original languageEnglish
JournalB.E. Journal of Economic Analysis & Policy
Publication statusPublished - 2006

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