Price and Quantity Policies in a Simple Political Economy Framework

Sumeet Gulati 1 , 1
  • 1 University of British Columbia, sumeet.gulati@ubc.ca

Abstract

The literature of the “second-best” demonstrated the difference between exogenous price and quantity distortions. However, it is not always realistic to assume that distortions are beyond the policy makers’ control. Are price and quantity distortions different even if they are endogenized using a political economy setting? In this paper, I postulate a government that uses trade and pollution policy to maximize a weighted welfare function where domestic producers get a higher weight than consumers. International trade is regulated by either a tariff or a quota, and pollution is regulated using a pollution tax. I find that if the government has full control on both trade and pollution policy, endogenously created quantitative distortions (quantitative restrictions) have the same effect as price distortions (tariffs).

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