The Expansion of State Economy and Discriminatory Subsidy in an Open Economy
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| Title | The Expansion of State Economy and Discriminatory Subsidy in an Open Economy
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| Author | Cui Fan, Shao Ting and Xu Qing |
| Organization | University of International Business and Economics;Development Research Center of the State Council;Shanghai University of Finance and Economics |
| Email | cuifan@uibe.edu.cn |
| Key Words | Discriminatory Subsidy; Oligopoly; State Monopoly; Trade Policy |
| Abstract | Following China’s commitments made around her entry into the WTO in 2001, China has lowered her tariff rates significantly. However, China's trade partners have been placing more and more complaints on China's practice of subsidization, while Chinese economists have been debating on the expansion of state economy and the diminishing of private sectors. China's subsidy is different from that in other countries in that it is often used as a discriminatory treatment to favor state-owned enterprises against private-owned enterprises. By using a simple model, this paper shows that a government has strong incentives to use a zero tariff rate and a high subsidy rate to foster its favored firm, e.g. a state-owned firm, to a monopolist if the government is allowed to grant discriminatory treatments. The authors also point out that although static welfare may be improved by such a policy, the whole economy may be worse off in the long run due to lack of competition. |
| Serial Number | WP131 |
| Time | 2011-10-27 |
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