In
economics, the Lerner paradox is the theoretical possibility that imposing
tariffs raises the world price of the
importgood, causing a deterioration of the tariff-imposing country's
terms of trade.[1][2]Abba Lerner showed the possibility in his
1936 article.[3]
Conditions
In the large country case of a
perfectly competitive market, imposing tariffs reduces the world price of the import good, improving the tariff-imposing country's terms of trade. However, under certain conditions, tariffs can have an opposite effect. Therefore, it is called a
paradox.
According to
Gene Grossman, a Lerner paradox occurs when the government spends most of its tariff
revenue to purchase the import good.[1]
According to
Pan-Long Tsai, a Lerner paradox occurs when the
elasticity of the tariff-imposing country's import
demand function is smaller than the government's spending share of its tariff revenue on the import good.[4]
Regarding the effect of tariffs on terms of trade, there is another paradox called the
Metzler paradox.
Koichi Hamada and Masahiro Endoh employ a
general equilibrium model with multiple goods to demonstrate the conditions that both a Lerner paradox and a Metzler paradox do not occur.[5] There is a study building a model with quality and markups to explain both Lerner paradox and Metzler paradox within a single framework.[6]
Abba Lerner's 1936 article, demonstrating the possibility of a Lerner paradox, also shows the
Lerner symmetry theorem.
In
economics, the Lerner paradox is the theoretical possibility that imposing
tariffs raises the world price of the
importgood, causing a deterioration of the tariff-imposing country's
terms of trade.[1][2]Abba Lerner showed the possibility in his
1936 article.[3]
Conditions
In the large country case of a
perfectly competitive market, imposing tariffs reduces the world price of the import good, improving the tariff-imposing country's terms of trade. However, under certain conditions, tariffs can have an opposite effect. Therefore, it is called a
paradox.
According to
Gene Grossman, a Lerner paradox occurs when the government spends most of its tariff
revenue to purchase the import good.[1]
According to
Pan-Long Tsai, a Lerner paradox occurs when the
elasticity of the tariff-imposing country's import
demand function is smaller than the government's spending share of its tariff revenue on the import good.[4]
Regarding the effect of tariffs on terms of trade, there is another paradox called the
Metzler paradox.
Koichi Hamada and Masahiro Endoh employ a
general equilibrium model with multiple goods to demonstrate the conditions that both a Lerner paradox and a Metzler paradox do not occur.[5] There is a study building a model with quality and markups to explain both Lerner paradox and Metzler paradox within a single framework.[6]
Abba Lerner's 1936 article, demonstrating the possibility of a Lerner paradox, also shows the
Lerner symmetry theorem.