Positive welfare effects of trade barriers in a dynamic partial equilibrium model

We develop a simple two-region, cobweb-type dynamic partial equilibrium model to demonstrate the existence of optimal, possibly non-zero, trade barriers. A pure comparative statics analysis of our model suggests that a reduction of trade barriers, modeled as small but positive import tariffs, always enhances welfare. However, taking a dynamic perspective reveals that nonlinear trade interactions between two regions may generate endogenous price fluctuations which can hamper welfare. Finally, we allow special interest groups, such as consumers or producers from these two regions, to lobby for a particular level of trade barriers. Our model predicts that time-varying trade barriers may be another channel for market instability.