TOURISM AND WELFARE-ENHANCING EXPORT SUBSIDIES

This paper develops a new argument for an export subsidy in the context of Mode 2 services trade (consumption abroad). Tourists consume a bundle of goods and services. Their choice of destination depends on the overall cost of this bundle. Using a monopolistic competition framework, a pricing externality is identifiedfirms do not internalize the effects of their pricing decision on the overall inflow of tourists. The paper develops conditions under which an export subsidy is optimal. It also serves to illustrate how trade policy in the context of service trade may differ from that targeting goods trade.