International Trade - Theory and Policy, 2010a

sufficiently high tariff in order to keep cheap foreign goods out and, in turn, maintain production of the
domestic goods.
Similar problems may arise in many other industries. Consider the potential problems for a country’s
national security if it could not produce an adequate amount of steel, aluminum, ships, tanks, planes, fuel,
and so on in the event of a war. The number of products that could be added to this list is enormous.
Indeed, at one time or another in most countries’ histories, it has been argued that almost every product
imaginable is important from a national security perspective and thus is deserving of protection. One of
the most interesting arguments ever described is that made by the embroidery industry, which once
argued for a protective tariff in the United States because embroidered patches on soldiers’ uniforms are
essential in maintaining the morale of the troops. Thus it was clear, to them at least, that the embroidery
industry needed to be protected for national security reasons.
National Security and Public Goods
We can make better sense of the national security argument if we classify it in the context of the theory of
the second best. In this case, we must note that the national security argument is actually incorporating a
market imperfection into the story to justify the use of a protective tariff. The market imperfection here is
a public good. National security is a public good and public goods are excluded from the standard
assumptions of perfect competition. Thus, whenever a product has public good characteristics, we can say
that a market imperfection is present. Traditionally, the literature in economics refers to concerns such as
national security as noneconomic objectives. The effects that food production may have on the nation’s
sense of security, for example, were thought to fall outside the realm of traditional economic markets.
In general, public goods have the following two consumption characteristics: they are nonexcludable and
they are nonrival. Nonexcludability means that once the product is produced, it is impossible to prevent
people from consuming it. Nonrivalry means that many people can consume the produced product
without diminishing its usefulness to others. Here are a few examples to explain the point. First, consider
a nonpublic good: soda. A soda is excludable since the producer can put it into a can and require you to
pay for it to enjoy its contents. A can of soda is also a rival good. That’s because if you consume the can of
soda, there is no way for anyone else to consume the same can. This implies that a can of soda is not a
public good. On the other hand, consider oxygen in the atmosphere. (This is an odd example because
oxygen in the air is not formally produced, but let’s ignore that for a moment.) Atmospheric oxygen is
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