Does a tariff really enhance welfare?

Tanaka (1993) argues the small reciprocal tariff reduces the average costs of firms and enhances the world welfare under a free entry Cournot oligopoly with increasing returns to scale. This paper shows the welfare improving effect which was found in Tanaka (1993) results from the relaxation of the excess entry. We also find, however, such a world welfare enhancing tariff is not valid because of the instability of the Cournot solution. It indicates that we must take great care about the stability in using the Cournot oligopoly model with increasing returns to scale. (c) 2005 Elsevier B.V. All rights reserved.