A Note on Optimum Policy Choice under Imperfect Domestic Market Conditions and Differentiated International Goods

Abstract

This note derives the optimal industrial and trade policy for a two-good, one-factor small economy. The first good is an homogeneous commodity. For the second good we assume that the domestic and the foreign versions are imperfect substitutes. We also assume that the country is a price taker in international markets except for the fact that it faces a downward sloping export demand for the differentiated good. Within this framework we first show the existence of welfare-improving active commercial policies, and then we prove that the optimal intervention is an antitrust policy. These results imply that (i) once the appropiate policy intervention is enacted free trade becomes optimal, and (ii) free trade does not eliminate the need for antitrust regulation.