Economics Research Community Seminar – Dr Anita Kopányi-Peuker

Title: Import tariffs in coupled cobweb markets: Exploring the trade-off between efficiency and volatility

Date: 24 April 2024

Time: 13:30-14:30

Location: NUBS.2.05

If you would like to attend, please register using the following link:

Import tariffs in coupled cobweb markets: Exploring the trade-off between efficiency and volatility

Speaker: Dr Anita Kopányi-Peuker

Abstract:

Although free trade is typically believed to maximize allocative efficiency, a decrease in barriers to trade might destabilize market dynamics and thereby be detrimental to welfare. In particular, recent theoretical work on coupled cobweb markets has shown that switching between markets by firms may lead to instability and perpetual price fluctuations that do not occur when these markets are isolated. Hence, there exists a trade-off between higher allocative efficiency at the steady state and higher price volatility. One implication of this is that import tariffs may enhance welfare by reducing volatility. We conduct a laboratory experiment to empirically test whether connecting cobweb markets increases price volatility, and examine whether welfare can be improved by introducing import tariffs. In our cobweb experiment participant in the role of suppliers can choose how much to produce to two output markets (home and abroad). We then study the effect of four different levels of import tariffs (0%, 20%, 30%, and 80%, the last representing autarky) on price volatility and surplus extraction. Our experiment shows that connecting markets leads to destabilization: a reduction in import tariffs increases price volatility in both markets. Furthermore, we find that extracted surplus is higher under free trade than under autarky. However, we do not find any evidence that import tariffs are detrimental to welfare, introducing a tariff of 20 or 30% does not significantly decrease the extracted surplus.