We develop a new optimal tariff theory that is consistent with the fact that a larger country sets a lower tariff. In our dynamic Dornbusch–Fischer–Samuelson Ricardian model, the long-run welfare effects of a rise in a country’s tariff consist of the direct revenue, indirect revenue, and growth effects. Based on this welfare decomposition, we obtain two main results. First, the optimal tariff of a country is positive. Second, the optimal tariff of a country is likely to be decreasing in its absolute advantage parameter, implying that a larger (i.e., more technologically advanced) country sets a lower optimal tariff.
ASJC Scopus subject areas
- Geography, Planning and Development