The Effects of Import Quotas on National Welfare: Comment

Recently in the Southern Economic Journal Palivos and Yip marry real and monetary analysis to provide an intriguing new argument for protection. Is this an idea which international agencies like the World Trade Organization and the World Bank should educate their member countries about? The authors consider an economy with differential cash-in-advance constraints, fiat money, and no interest payments on cash. They argue that the first best policy in such an economy is differential consumption taxes, and if the exportable is cash intensive a second best policy is an import quota. In this Comment we argue that paying interest on cash (or equivalently deflating the economy) is better than differential taxation because it is administratively simpler and cheaper; for variants of the model it is welfare superior; and it is less susceptible to manipulation by rent seekers.