Welfare effects of unbundling under different regulatory regimes in natural gas markets

In this paper, we develop a theoretical model that enriches the literature on the pros and cons of ownership unbundling vis-à-vis lighter unbundling frameworks in the natural gas markets. For each regulatory framework, we compute equilibrium outcomes when an incumbent firm and a new entrant compete à la Cournot in the final gas market. We find that the entrant’s contracting conditions in the upstream market and the transmission tariff are key determinants of the market structure in the downstream gas market (both with ownership and with legal unbundling). We also study how the regulator must optimally set transmission tariffs in each of the two unbundling regimes. We conclude that welfare maximizing tariffs often require free access to the transmission network (in both regulatoy regimes). However, when the regulator aims at promoting the break-even of the regulated transmission system operator, the first-best tariff is unfeasible in both regimes. Hence, we study a more realistic set-up, in which the regulator’s action is constrained by the break-even of the regulated firm (the transmission system operator). In this set-up, we find that, for a given transmission tariff, final prices in the downstream market are always higher with ownership unbundling than with legal unbundling.     

Efficiency in an Economy with Fixed Costs

It is by now well known that in an economy with increasing returns, first-best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important class of economies in which the only source of nonconvexities is the presence of fixed costs. Even in this context, it is possible that none of the equilibria based on marginal cost pricing are efficient (unless additional, strong assumptions are made). We argue that available results on the existence of an efficient two-part tariff equilibrium rely on very strong assumptions, and we provide a positive result using a weak surplus condition. Our approach can also be used to establish the existence of an efficient marginal cost pricing equilibrium with endogenously chosen lump-sum taxes if the initial endowment is efficient in the economy without the production technology.     

Urban unemployment and optimal trade policy in a cash-in-advance economy

This paper examines the welfare effects of commercial and tax/subsidy policies on a developing economy with sectoral unemployment and differential cash-in-advance constraints. The optimal tariff can be negative when the cash-in-advance requirement for buying the importable good is larger than that for the exportable good. In addition, when capital is sectorally mobile, production taxes are superior to production subsidies to the importable sector. Nevertheless, to reach the first-best optimum, a uniform wage subsidy to both sectors is required.     

Dynamics of economic efficiency in tariff and trade

When the efficiency losses or gains as a result of an ad valorem import tariff are accounted for, the exisiting literature compares the equilibrium states before and after the tariff. However, after the imposition of an ad valorem tariff, the cost of the foreign producer to sell in the domestic market jumps upwards by the extent of the ad valorem tariff. This affects the quantity of imports, and the market is no longer in the initial equilibrium. The market then adjusts and after some efficiency loss, a new equilibrium state is arrived at. The mechanism of price adjustment has a basis of lack of coordination among buyers and sellers at the exisiting prices. The economic efficiency loss when the market is out of equilibrium is not taken into consideration in the literature, while deriving an optimal ad valorem tariff rate. In this article, an optimal ad valorem tariff schedule has been derived. From optimality, it should be construed that the economic efficiency losses get minimised when the market is adjusting and also during the equilibrium. A revenue constraint has to be met in addition.     

First-best health policy in vaccine markets with health and network externalities

This paper considers an oligopolistic market for a vaccine, characterized by negative network effects, which stem from the free-riding behavior of individuals engaged in a vaccination game. Vaccine markets often suffer from three imperfections: high concentration, network effects, and a health externality (contagion). The first conclusion of the paper is that the negative network externality is important as a market distortion, as it may lead to significant welfare losses. The second and main part of the paper develops a two-part per-unit subsidy scheme that a social planner could use to target both consumers and producers of vaccines. The scope of such a subsidy scheme to induce the firms to produce the first-best output without network effects (which is the most ambitious first-best target) is investigated. In many cases, while the first-best is attainable, it requires negative prices for vaccines, which amounts to rewarding consumers to induce them to vaccinate.     

Optimal Policy Intervention To Reduce Import Dependence

Should a country wish to reduce its dependence on imports of a certain commodity, an import tariff is typically recommended as the first-best (lowest-cost) policy instrument for achieving this non-economic objective. This note shows that while this is correct if the objective is to restrain imports to a certain quantity, it is not correct if the target is to reduce imports to a certain percentage of domestic consumption. In the latter case, a tariff-funded subsidy to producers is also required, the extent of which is larger the smaller the domestic price elasticities of demand and supply for the commodity. [410]     

Restrictive or expansive selection: the uneven role of tariff structure in improving market access

We estimate the effect of tariff reforms on market access from the Doha Round until the Great Recession. Gravity estimates yield significant effects of the variation in tariff structure. The change in the Mercantilist Trade Restrictiveness Index reveals that the change in tariff dispersion reflects a restrictive selection counteracting the effect of average tariff reductions. Restrictiveness is concentrated in East Asia and Pacific while, in Latin America and Caribbean, selection is expansive. We illustrate reforms in China, finding strong restrictive selection. Simulations highlight reforms with unchanged dispersion for their larger improvement in market access and a simultaneous improvement in welfare.     

The Effects of Trade Liberalization On Cost-Reducing Horizontal Mergers*

This paper analyzes the effects of tariff reductions on horizontal mergers in a Cournot oligopoly in a two-country world. It is shown that for mergers between two domestic firms and for cross-border mergers which supply both markets from a foreign plant, unilateral tariff reduction encourages mergers which concentrate market power at the expense of mergers which reduce cost, while bilateral tariff reductions have the opposite effect, encouraging mergers which significantly reduce cost. Cross-border mergers which continue to supply each market from a local plant are discouraged by both unilateral and bilateral tariff reduction.     

Trade Liberalization and the Profitability of Domestic Mergers

It is often thought that a tariff reduction, by opening‐up the domestic market to foreign firms, should lessen the need for a policy aimed at discouraging domestic mergers. This implicitly assumes that the tariff in question is sufficiently high to prevent foreign firms from selling in the domestic market. However, not all tariffs are prohibitive, so that foreign firms may be present in the domestic market before it is abolished. Furthermore, even if the tariff is prohibitive, a merger of domestic firms may render it nonprohibitive, thus inviting foreign firms to penetrate the domestic market. Using a simple example, the authors show that, in the latter two cases, abolishing the tariff may in fact make the domestic merger more profitable. Hence trade liberalization will not necessarily reduce the profitability of domestic mergers.     

Preferential trade and mis-invoicing: Some analytical implications

This paper examines how different trade policies affect illegal trade practices, foreign exchange market and the degree of illegal capital outflow. It builds up a three-country preferential–non-preferential trade model where low or zero tariff prevails in the preferential trade channel and higher tariff is exercised in the non-preferential trade channel. We show that initially the preferential trade channel is likely to encourage illegal capital outflow and non-preferential trade channel is conducive for illegal transactions in foreign exchange in the local market. But finally a low tariff regime takes care of both illegal capital outflow and black market for foreign exchange.     

A short-run econometric analysis of the demand and import supply of a horticultural good: tomatoes

This paper considers the problem of estimating the short-run effects of nominal tariff and domestic production levels on the levels of imports and final market prices of fresh tomatoes in the UK during the period 1959–1968. Prior to EEC entry, tariff production was used as the main policy instrument for horticultural support; horticultural goods being exempt from guarantee or intervention price schemes. In retrospect it would, therefore, seem useful to consider the theoretical requirements for its effective use in such a market situation. The paper consists of two parts. The first section discusses a simple comparative-static specification of a simultaneous equation market model determining the prices and import levels of a single horticultural good and goes on to derive measures of the effects of tariff rate and domestic production changes on market equilibrium. The second section presents several sets of alternative estimates of the specified market model and calculated effects for the specific case of fresh tomatoes during the period 1965–68     

On tariff and quality innovation in a market with discrete preferences

In a market for a quality-differentiated good with heterogeneous set of consumers and a local firm facing competitive imports from abroad, we examine private and social incentives for quality innovation. For differential tariff regime, we show that both the private and social gains increase with the tariff protection for the low-quality segment of the domestic market for any given tariff on high-quality imports. But for some very high costs of innovation, the local firm may not undertake a socially desirable innovation. The pro-competitive effect, on the other hand, ensures that quality-distortion-at-the-bottom occurs only for very high levels of tariffs.     

Market integration and tariff cooperation between asymmetric countries

This study explores the relationship between market integration—specifically a reduction in trade costs—and the sustainability of tariff cooperation, using a repeated game approach. We explore the property of noncooperative and cooperative tariffs about trade costs and the size of the domestic industry. We find that market integration does not induce the tariff rates to be lowered bilaterally in the noncooperative policy regime. By contrast, the cooperative regime brings about a bilateral tariff reduction when the market becomes integrated. Furthermore, by using the repeated game approach, we demonstrate that market integration facilitates cooperation between asymmetric countries.     

Tariff and Quota Equivalence in Vertically Related Markets

This paper re‐examines the issue of tariff and quota equivalence by introducing an upstream market into the Hwang and Mai (1988 ) model, and then allowing the two downstream firms to cross‐haul within each other's market. We assume the upstream monopolist can select either a two‐part or a one‐part tariff pricing strategy. It is found that if the upstream firm adopts a two‐part (one‐part) tariff pricing strategy, then the market price of the final good under a tariff will be higher (lower) than that under an equivalent quota; that is, the quota is set at the import level under the tariff regime. This result stands in stark contrast to the prior findings of both Hwang and Mai (1988 ) and Fung (1989 ). Moreover, if the quota rent is set as being equal to the tariff revenue, the social welfare under a tariff will necessarily be lower than that under an equivalent quota.     

Labor markets and mating markets: Using taxes to reduce the male–female pay gap

Recently, Frank and McKenzie (J Bioecon 8(3):269–274, 2006) pointed out that beside discrimination, there is a further reason for a wage gap between males and females: If females value partner wages more than males in the mating market, this would increase the pay gap. In this paper, it is analyzed whether there exist policies that may improve the position of females and males from a distributional point of view without destroying the signal females want about the labor market success of males. First-best redistribution policies require the knowledge of the male and female wage preferences. Because this information is not available, a first-best redistribution policy seems infeasible. As an alternative policy, a differentiated wage tax is considered which is less information demanding than a first-best policy. It is shown that a welfare increasing wage tax scheme does exist and that an adequately chosen wage tax scheme may decrease the gender wage gap without destroying the desired signal of wages for labor market success.     

The welfare implications of trade liberalization between the Southern Mediterranean and the EU

The impact on the Southern Mediterranean Countries (SMC) of the current process of trade liberalization with the European Union is explored. The methodology is that of computable general equilibrium modelling under imperfect competition and the model includes ten countries and 11 sectors. This allows for both a cross-country and cross-sectoral analysis of the results. The experiments considered are the full liberalization of tariffs, as well as changes in market access and trade-induced changes in productivity. A key feature of the paper is that the phased introduction of tariff reductions is allowed for as explicitly envisaged in the Agreements. The results show that the process of liberalization may have a substantial, though non-monotonic, impact on the SMC economies in terms of both changes in production and through this on welfare. The welfare impact is potentially very high in particular for the high tariff economies. The sources of the welfare gain tend to derive from perfectly competitive explanations of trade for the high tariff economies, and from imperfectly competitive explanations of trade for the low tariff economies.     

ALTERNATIVE OPTIMAL TRADE POLICIES IN THE PRESENCE OF FOREIGN INPUT MONOPOLY

Abstract.  This paper develops a generalized three-country model with downstream and upstream industries to analyze optimal import and export trade policies in the presence of monopoly distortion in a foreign intermediate input market. It shows that the import tariff and export tax are linearly dependent. Thus, the optimal choice of the tariff gives rise to the same results as the optimal choice of the export tax, which implies that the domestic government, to avoid tariff retaliation, can use export tax as a substitute for the import tariff.     

Simulated economic impacts in applied trade modelling: A comparison of tariff aggregation approaches

This paper assesses the performance of two recently developed tariff aggregators in reducing tariff aggregation bias by analysing Swiss beef market liberalisation scenarios. Specific relevant sources of bias are addressed: substitution effects on import demand, Tariff Rate Quotas and overprotection in tariffs. The aggregators are linked to a global large-scale partial equilibrium model and benchmarked against a standard aggregator. The choice of the aggregation method shows considerable effects on simulated economic impacts, specifically if the dispersion in tariffs or tariff cuts is large. A large bias is revealed in simulated gains from trade liberalisation using the standard aggregator. The impacts on traded quantities are found to be overestimated, while price and welfare effects can be higher or lower by switching to alternative aggregation methods. By reducing aggregation bias and depicting negotiated tariff schedules more directly, the proposed aggregators enhance the contribution of trade modelling to evidence-based policy making.     

Technologies,preferences, and policies for a sustainable use of natural resources

We discuss eight contributions that combine the topics of sustainable natural resource use and economic dynamics. In the first part we consider enhanced oil recovery (EOR), carbon capture and storage (CCS), as well as innovations allowing for energy-efficiency improvements and renewable energy cost reductions. We discuss how to include these technologies and innovations in CGE models, how each of them has different effects on the timing of emissions and abatement and on total emissions, and how (first-best as well as second-best) complementary policies (in particular, emission taxes and innovation subsidies) differ across these technologies. In the second part we compare differences in intergenerational preferences towards resource conservation - altruistic preferences and concern for social status from relative consumption -and also found sharply contrasting effects across the alternative assumptions.     

Quota-Induced Cycles

We present a new framework to compare the dynamic effect of tariffs and quotas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity-setting game over time in a perfectly stationary economy. A Markov-perfect equilibrium has the foreign firm exporting at the constant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluctuations in domestic production. Quota-induced cycles can make dynamic market segmentation possible and raise profits for both the firms above what they earn under the equal-import tariff.