Do profit maximisers take cold showers? Another look at protection and technical efficiency

In this paper we consider whether a 'cold shower' is possible if the firm we are analysing is a conventional neoclassical profit-maximising firm facing competitively determined prices. In the context of this analysis, the term 'cold shower' refers to a situation where the removal of a protective subsidy induces investment in a cost-reducing technology. First we show that if the investment lowers marginal cost everywhere, then our firm will never respond to the removal of the subsidy by making the investment. We then use this result to carefully construct examples where the investment does not lower marginal cost everywhere. These examples are devised to illustrate a cold shower scenario where, with no protection in place, the firm makes the investment, that would have been rejected, if the protection had have been in place.