Domestic Monopoly, Quotas & Contestable Rents

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Bulletin of Economic Research

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In this article, a specific example is given to illustrate that rent seeking can raise welfare under full seeking in general equilibrium: an import quota is levied in the presence of domestic monopoly in the import competing industry. An import quota is considered instead of an import tariff since a tariff confers no market power on the local monopolist. The monopolist still faces a perfectly elastic demand, corresponding now to the world price plus tariff. The introduction of monopoly does not add another distortion to the economy, which is necessary if full rent seeking is to be welfare improving. But with an import quota, the monopolist confronts a negatively sloped demand function, and sets marginal revenue equal to marginal cost. Therefore, there is another distortion and the possibility of full rent seeking improving welfare can be considered. The welfare improving result does not depend on partial seeking. The important distinction regarding welfare improving rent seeking is not between partial and full seeking but between partial and general equilibrium. Partial or full rent seeking is necessarily welfare reducing in partial equilibrium, but neither partial nor full seeking necessarily lowers welfare in general equilibrium.


Version of record can be found through < a href="http://dx.doi.org/10.1111/j.1467-8586.1993.tb00574.x">Wiley.

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