In economics, the Lerner paradox is the theoretical possibility that imposing tariffs raises the world price of the

import An import is the receiving country in an export from the sending country. Importation and exportation are the defining financial transactions of international trade. In international trade, the importation and exportation of goods are limited ...

good, causing a deterioration of the tariff-imposing country's terms of trade.Grossman, G. (2016
"The Purpose of Trade Agreements."
NBER Working Paper No. 22070, page 13, footnote 12. Abba Lerner showed the possibility in his

1936 Events January–February * January 20 – George V of the United Kingdom and the British Dominions and Emperor of India, dies at his Sandringham Estate. The Prince of Wales succeeds to the throne of the United Kingdom as King E ...

article.

Conditions

In the large country case of a

perfectly competitive In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models wh ...

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. *According to Pan-Long Tsai, a Lerner paradox occurs when the

elasticity Elasticity often refers to: *Elasticity (physics), continuum mechanics of bodies that deform reversibly under stress Elasticity may also refer to: Information technology * Elasticity (data store), the flexibility of the data model and the cl ...

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. *Regarding the effect of tariffs on terms of trade, there is another paradox called the

Metzler paradox In economics, the Metzler paradox (named after the American economist Lloyd Metzler) is the theoretical possibility that the imposition of a tariff on imports may reduce the relative internal price of that good. It was proposed by Lloyd Metzler ...

. 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. There is a study building a model with quality and markups to explain both Lerner paradox and Metzler paradox within a single framework.Hayakawa, K., T. Ito, and H. Mukunoki (2019
"Lerner Meets Metzler: Tariff Pass-through of Worldwide Trade.
IDE Discussion Paper No. 741. *Abba Lerner's 1936 article, demonstrating the possibility of a Lerner paradox, also shows the Lerner symmetry theorem.

References

International trade theory Paradoxes in economics {{international-trade-stub

Conditions

See also

References