A national-security argument for trade protection

Abstract

This paper constructs a two-period model in which a domestic monopoly firm produces a good given an amount of import of the good. In the second period, the monopoly firm faces a capacity constraint with regard to its production level. The production level in the first period sets the maximum quantity for the second period. We investigate the effects of quotas on welfare to examine the economic rationale of the national-security argument for trade protection. Under decreasing marginal costs of a monopoly firm, tightening the import quota may increase the domestic consumer surplus and the social welfare.