Do industrial and trade policy lead to excess entry and social inefficiency?

Abstract

This paper analyzes the welfare effects of industrial and trade policy instruments (output subsidies or/and import tariffs) in an international Cournot oligopoly and compares the social efficiency of specific policy instrument or dual policy instruments (output subsidies-cum-import tariffs) with free entry of domestic firms. It first demonstrates that free entry of domestic firms is always socially excessive irrespective of the policy regimes rate in an open economy. It then shows that optimal tariff rate and output subsidy rate under free entry of domestic firms will be lower than the one at regulated entry when the scale of domestic market is moderate; for dual policy regime, the optimal output subsidy rate at free entry is lower than the one at regulated entry, while the optimal tariff rate at free entry is higher than the one at regulated entry. Furthermore, even though the need of dual policy for welfare improvement is degenerate to be suboptimal with the free entry of domestic firms, but it is still superior to the subsidy policy.