Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 23

Japanese officials are considering a new tariff on imported pork products from the United States in an attempt to reduce Japan's reliance on U.S. pork. Due to political pressure, the U. S. International Trade Representative's (ITR) office is also considering a new tariff on imported steel from Japan. Officials in both Japan and the United States must assess the social welfare ramifications of their tariff decisions. Reports from a reliable think tank indicate the following: If neither country imposes a new tariff, social welfare in Japan's economy will remain at $10 billion and social welfare in the United States will remain at $50 billion. If both countries impose a new tariff, welfare in the United States declines $49.1 billion and welfare in Japan declines by $9.5 billion. If Japan does not impose a tariff but the United States does, projected welfare in Japan is $8.9 billion while welfare in the United States is $52.5 billion. Finally, if the United States does not impose a tariff but Japan does, welfare is projected at $48.2 billion in the United States and $11.4 billion in Japan. Determine the Nash equilibrium outcome when policy makers in the two countries simultaneously but independently make tariff decisions in a myopic (one-shot) setting. Is it possible for the two countries to improve their social welfare by "agreeing" to different strategies? Explain.