With imperfectly competitive product markets, producers react to the
auction of quota licenses by adjusting price upwards from the free trade
level. As a result, license revenues are significantly lower than if markets
were perfectly competitive. In fact, they are often zero unless quotas are
very restrictive. In such markets, giving part of these revenues to the
producers reduces the incentive to raise product prices and leads to the
reappearance of revenues from auctioning quota licenses. With a foreign
monopoly and no price discrimination, such a policy can lead to a Pareto
improvement over free trade. The conditions under which such altruism raises
welfare both from free trade and from the status quo are explored.
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