Abstract

We examine the behavior of a country that imposes a minimum standard (MS) on a good produced by a domestic firm and a foreign competitor. Costs rise with the standard, and there is a fixed setup cost of producing at two standard levels. Depending on the size of the foreign market and the fixed setup cost, the domestic firm will lobby for the lowest MS that excludes the foreign firm or for no standard at all. When there is a consumption externality, the MS chosen by the domestic social planner is a non-increasing function of the size of the foreign market and is always protectionist. (C) 2000 Elsevier Science B.V. All rights reserved.