Optimal Tariff Policy on Imports from Multinationals*

Using partial equilibrium analysis, it is shown that for small countries there is an optimal tariff on imports from a monopolistic multinational. There is also (under specified circumstances) a tariff at which the multinational finds subsidiary production more profitable than exports: the switchover tariff. The interaction between the optimal and switchover tariffs is analyzed from the small country's welfare standpoint. The conclusion is that there is not one, but a variety of possible optimal policies for the country: trade at the optimal tariff, with or without prohibition of subsidiary production, or tariff-protected subsidiary production.     

Smuggling and Bhagwati's Nonequivalence Between Tariffs and Quotas

The authors extend Professor Bhagwati's analysis about the nonequivalence between trade policy instruments when domestic production is monopolized and the terms of trade are endogenous, by allowing for smuggling. They show that the dominance of the ad valorem tariff over the quota is not robust. Tariffication can lower welfare even when the level of illegal imports is quite small. However, tariffication with a specific tariff is always beneficial because the specific tariff dominates the ad valorem tariff and the quota with or without smuggling. Smuggling (or the threat) also tends to lower the second–best tariff/quota, and increases welfare when imports are restricted by a quota, but lowers it under a tariff.     

Tariffs,Quotas, and Forward Contracts under Asymmetric Information*

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.     

On the interaction between public and private capital in economic growth

This paper introduces two forms of interaction between private and public capital in an endogenous growth model in which productive government expenditure takes the form of a stock-variable and public capital is used in part as an input in the production of final output and in part to increase its own supply. While the first form of interaction involves the stocks of the two capital-goods and takes place within the final output sector through the specification of the aggregate production function (Cobb?CDouglas vs. CES), the second one concerns the rates of investment in the two kinds of capital. The share of productive public expenditure devoted to output production can be either exogenous or endogenous. Our results suggest that when this share is exogenous, along the balanced growth path the optimal growth rate of the economy is a positive function of the degree of complementarity between the two forms of investment. When the share of productive public expenditure devoted to output production is endogenous, the public capital share in GDP becomes, along with the model??s preference parameters, an important determinant of the economy??s long run growth. We also find that the optimal growth rate is an increasing function of the elasticity of substitution between public and private capital inputs in goods production, and is independent of the complementarity/substitutability between the two forms of investment.     

Optimal Tariffs under a Revenue Constraint*

This paper examines the optimal tariff structure under a revenue constraint. When a fixed level of tax revenue has to be collected from the tariff alone, no adjustment in tariff rates can achieve an efficient resource allocation, even in a small open economy. Hence, the optimal tariff problem arises under a revenue constraint. We show that the revenue‐constrained optimal tariff structure is characterized by the following two rules: (i) the optimal tariff rate is lower for the import good that is a closer substitute for the export good, and (ii) the stronger the cross‐substitutability between imports, the closer the optimal tariff is to uniformity. This provides a theoretical explanation for the finding in empirical studies that the efficiency loss from a uniform tariff structure is negligible.     

A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes

This paper develops a Ricardian model with transaction costs and endogenous and exogenous comparative advantages. It shows that the level of division of labour and trade increases as transaction conditions improve. It identifies the conditions for trade negotiations that result in zero tariff rates and the conditions for the coexistence of unilateral tariff protection and unilateral laissez faire policies. The model may explain the policy transformation of some European governments from Mercantilism to laissez faire in the 18th and 19th century and policy changes in developing countries from protection tariff to trade liberalization and tariff negotiation.     

Competitive General Equilibrium with Finite Change and Theory of Policy Making

We visit the non‐equivalence of tariff and quota in higher dimensional finite change trade models when goods outnumber factors of production. Under competitive conditions, exogenous shocks (e.g., exposure to international trade) support the production of only a subset of commodities. If we try to protect some of the vanishing goods, tariff and quota will have different results when a tariff turns out to be a more restrictive policy than a quota, contrary to the conventional wisdom.     

Trade imbalance and the endogenous optimal tariff

Endogenous tariff literatures reveal empirically that trade imbalance is negatively related with import tariff, this article gives a theoretical evidence and explanation to support this finding with the methodology of multi-country numerical general equilibrium modelling and simulation. We explore how optimal tariff changes after trade imbalance is introduced, and find that optimal tariffs decrease substantially, either for surplus or deficit countries, when imbalance is considered. Specifically, when the imbalance is modelled in endogenous monetary and inside-money structures, the optimal tariffs decrease by 26% globally on average. Our results suggest that the deepening trade imbalance is beneficial to the global trade liberalization due to its driving tariffs down.     

Trade Policies for Exporting Industries under Free Entry

This paper computes optimal export taxes and domestic production subsidies for exporting industries under free entry. We show that domestic welfare is not at maximum, as is typically believed, when the export price is a monopoly price, and the domestic price is a competitive price, because a market structure effect has to be taken into account. Furthermore, we show that the optimal tax/subsidy formulas for an oligopoly coincide with those under perfect competition, if foreign and domestic demand functions are both linear. We also discuss optimal trade policies when only one instrument is available, and we run numerical simulations to determine and compare optimal trade taxes under endogenous and exogenous market structures.     

Optimal patent licensing—Two or three-part tariff

We look into technology transfer by an insider patentee in a spatial duopoly model under three types of licensing contracts—(i) two-part tariff with fixed fee and per-unit royalty, (ii) two-part tariff with fixed fee and ad-valorem royalty and (iii) general three-part tariff with fixed fee, per-unit and ad-valorem royalties. Under two-part tariff contracts, the licenser is better off with the per-unit royalty contract but the general contract does better than the other contracts. In contrast to the existing literature, all three licensing contracts may make the consumers worse-off compared to no licensing, with the lowest consumer surplus achieved under the general licensing contract. Welfare under the general licensing contract is equal to the welfare under two-part tariff with ad-valorem royalty and it is higher than the welfare under no licensing but lower than the welfare under two-part tariff with per-unit royalty. Hence, the general three-part licensing contract is privately optimal but not socially optimal. Similar conclusions hold also under a nonspatial linear demand model with differentiated products.     

Tourism and the environment

This paper examines the effects of pollution taxes on welfare and environment for a small open economy. In the presence of tourism, pollution taxes provide a double dividend of less pollution and improvements in the tourism terms of trade. The optimal pollution taxes are derived under exogenous and endogenous tourism, and they can be greater or less than the marginal damage of pollution perceived by the domestic residents. Numerical simulations show that the optimal tax rate is larger under exogenous tourism.     

Environmental Funds,Public Abatement,and Welfare

This paper addresses some features of environmental funds that the government uses to finance public abatement with pollution tax revenue or tariff revenue. I find that when the pollution tax rate and the tariff rate are jointly chosen optimally, then the optimal pollution tax rate is higher than the Pigouvian tax rate under public abatement financed by tariff revenue, and lower when public abatement is financed by pollution tax revenue. Furthermore, I show that the optimal tariff rate is positive regardless of which tax revenue is used to finance public abatement. These results are relevant for countries where the government seeks revenues earmarked for the financing of environmental funds.     

PRIVATIZATION AND EFFICIENCY GAIN IN AN INTERNATIONAL MIXED OLIGOPOLY WITH ASYMMETRIC COSTS*

This paper examines two policy instruments, privatization of the domestic public firm and imposition of a tariff on foreign private firms in an international mixed oligopolistic model with asymmetric costs. It first demonstrates that different orders of moves of firms will imply different government decisions on optimal tariff and on privatization policy. Following Hamilton and Slutsky (1990 ), this paper then uses an extended game to discuss endogenous roles. It indicates that the efficiency gain that highlights the importance of foreign competition is crucial in determining the welfare improving privatization policy. Moreover, the endogenous equilibria are associated with different government decisions on privatization.     

Ex post vs. ex ante pricing: Optional calling plans and tapered tariffs

We study optimal nonuniform pricing in a setting where a customer's demand at the start of a billing period contains a random variable whose realization becomes known by the end of the billing period. In this context, an optional calling plan is a tariff which the consumer must select based on his/her expectations about the random variable, whereas, under a tapered tariff, the consumer's choice of usage charge is made after he/she knows the realization of the random variable. We show that for low to moderate levels of uncertainty about the random variable entering the demand function, the optional calling plan approach to nonuniform pricing yields higher expected profit than does the tapered tariff approach, given risk-neutral consumers. We illustrate this finding with a case study and argue that it is consistent with the historical evolution of tariffs in the interexchange telecommunications market.     

A Case Against Zero Capital-Income Taxation

This paper develops a dynamic general equilibrium model to investigate the optimal level of capital income taxation in light of stochastic endogenous economic growth. Although endogenous human capital is incorporated into our model, we restrict our investigation to the issue of optimal physical capital income tax; and the labor supply is also endogenously determined. This paper proves that the optimal capital income tax should be zero provided exogenous government expenditure on production; however, capital income should be taxed if we consider endogenous government consumption.     

The structure of Nash equilibrium tariffs

This paper examines theoretically the structure of optimal (Nash equilibrium) tariff rates in a two-country economy with more than two traded goods. We provide a condition under which the equilibrium tariff rates are uniform in both countries, and explore the relative size of the equilibrium tariff rates in each country when the uniform tariff condition is not satisfied. The elasticities of compensated excess demand for goods play an important role in characterizing the structure of the equilibrium tariff rates. This paper undertakes the analysis using a dual approach.     

Revenue-Constrained Combination of an Optimal Tariff and Duty Drawback

A duty drawback is an export subsidy determined as a percentage of the tariffs paid on the imported inputs used in its production. This paper examines the revenue-constrained optimal tariff structure in a small open economy including a duty drawback as a trade policy tool. This paper has two main aims. First, we show that the revenue-constrained optimal combination of tariff and duty drawback for a given revenue level is not unique. Second, we show that if the optimal import tariff rates are all positive when the duty drawback rate is zero, then the optimal import tariff rates are always positive when the duty drawback is positive.     

The structure of optimal tariff rates in a large country with market power

We theoretically analyze the optimal tariff problem that arises in a large country with market power. By using a model with more than two traded goods, we derive (1) the condition for optimal import tariff rates to be ranked, and (2) the condition under which the optimum import tariff becomes uniform. These conditions are established in a three-good model and in an N-good model. The results are evaluated on the basis of compensated excess demand elasticity, and hence do not require information on income effects. I would like to thank Tatsuo Hatta, Makoto Okamura, Katsuhiko Suzuki and two anonymous referees for their helpful comments and suggestions.     

Mergers and Trade Policy under Oligopoly

For an oligopolistic industry, the effects of mergers on the domestic country's optimal trade policy are analyzed. If the domestic country pursues an optimal trade policy then it will always lose as a result of a foreign merger. The optimal domestic response to a foreign merger is to decrease (increase) the tariff if demand is concave (convex) and to increase the production subsidy. The foreign merger reduces foreign welfare when the domestic country pursues its optimal trade policy. The optimal domestic response to a domestic merger is to leave the tariff unchanged and to increase the production subsidy.     

A proposal for social pricing of water supply in Côte d'Ivoire

We consider the design of a nonlinear social tariff for residential water in Côte d'Ivoire, which is a case of a monopolistic private operator supplying a population of heterogeneous consumers. The proposed optimal tariff includes an initial “social” block with a low unit price, and higher consumption blocks with a monopoly pricing rule. This optimal nonlinear tariff is calibrated using econometric estimates of a panel-data residential water demand equation. Welfare changes associated with moving from the actual tariff to approximations of the optimal pricing system are computed under different tariff scenarios. We find that gains in consumer welfare would outweigh losses in producer surplus in a majority of Ivorian local communities.