Welfare-Enhancing Import Subsidies

Welfare-Enhancing Import Subsidies

The concept of comparative preference is developed. It is shown using this concept in a model analogous to that of Itoh and Kiyono that a subsidy on imports of a good may be beneficial to the importing country. Two sets of models are developed to demonstrate when and why import subsidies may be welfare-enhancing to the importer. One set includes three goods and two countries and the other includes two goods and three countries. For each set, propositions are illustrated for a simple model with specific functional forms using the phenomenon of comparative preference. Propositions are also presented in more detail with general models. The roles of key parameters are explained and optimal subsidy expressions are derived. Relationships with alternative tariff policies are explained.