This paper compares the orthodox optimal tariff formula with the appropriate welfare-maximizing tariff when there are a few producing or importing firms operating in the domestic market. We show that the welfare-maximizing tariff can be very low, voire negative in some cases while in others it can even exceed the maximum-revenue tariff. We also show that the relationship between the welfare-maximizing tariff and the number of firms need not be monotonically increasing. This is so because the tariff is not strictly used to internalize the terms of trade externality. The tariff is also used to manipulate cost asymmetries between producing and importing firms when importing activities are concentrated in the hands of a few traders. Moreover, we show that welfare-maximizing specific tariffs are never worse than their ad valorem counterparts.
- optimal tariffs,
- maximum-revenue tariffs,
- Cournot competition,
- cost asymmetries.
Available at: http://works.bepress.com/jp_gervais/10/