Japanese officials are considering a new tariff on imported pork products from the USA 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 U.S. must assess the social welfare ramification 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 $4.8 billion and social welfare in the U.S. will remain at $44 billion. If both countries impose a new tariff, welfare in the U.S. declines 0.5 percent to $43.78 billion and welfare in Japan declines by 0.8 percent to $4.76 billion. If Japan does not impose a tariff but the U.S. does, projected welfare in Japan is $4.66 billion while welfare in the U.S. is $ 44.2 billion. Finally, if the U.S. does not impose a tariff but Japan does, welfare is projected at $43.66 billion in the U.S. and $4.85 billion in Japan. Determine the Nash equilibrium outcome when policymakers in the two countries simultaneously but independently make tariff decisions in a myopic (one-shot) setting. Is it possible for the countries to improve their social welfare by "agreeing" to different strategies? Explain.
Japanese officials are considering a new tariff on imported pork products from the USA 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 U.S. must assess the social welfare ramification 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 $4.8 billion and social welfare in the U.S. will remain at $44 billion. If both countries impose a new tariff, welfare in the U.S. declines 0.5 percent to $43.78 billion and welfare in Japan declines by 0.8 percent to $4.76 billion. If Japan does not impose a tariff but the U.S. does, projected welfare in Japan is $4.66 billion while welfare in the U.S. is $ 44.2 billion. Finally, if the U.S. does not impose a tariff but Japan does, welfare is projected at $43.66 billion in the U.S. and $4.85 billion in Japan. Determine the Nash equilibrium outcome when policymakers in the two countries simultaneously but independently make tariff decisions in a myopic (one-shot) setting. Is it possible for the countries to improve their social welfare by "agreeing" to different strategies? Explain.
