A lesson for Minister Flaherty on perfect competition

Yesterday, Federal Finance Minister Jim Flaherty asked business leaders to pass on savings on imports from the higher Canadian dollar:

“I won’t name the companies, but have spoken to some business leaders about ensuring that they pass along savings … price reductions that should follow the higher Canadian dollar”

Minister Flaherty, permit me to give you a lesson (surely a review) in what you’re supposed to believe. If the price of imports is above cost, an individual importer will have the incentive to lower its prices and take all the market share. Competition theory predicts that each importer will undercut the other until price equals the marginal cost of the imported good. Perfect competition.

In other words Minister, in the theoretical world you live, you need not call on business leaders to reduce prices. They’ll figure that out.

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