Optimal Tariffs: Should Australia Cut Automotive Tariffs Unilaterally?

We derive formulas for the optimal tariff rate in four theoretical models. We start with a model in which industries are competitive and then successively allow for: monopoly pricing by export industries, revenue‐replacement costs and cold‐shower effects. The theoretical formulas accurately explain...

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Bibliographic Details
Published in:The Economic record 2010-06, Vol.86 (273), p.143-161
Main Authors: DIXON, PETER B., RIMMER, MAUREEN T.
Format: Article
Language:English
Subjects:
Applied general equilibrium models
C68
Computational methods
Elasticity of demand
Export demand
Export value
Exports
F13
F14
Monopolistic competition
Non-linear models
Studies
Tariffs
Trade theory
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Summary:We derive formulas for the optimal tariff rate in four theoretical models. We start with a model in which industries are competitive and then successively allow for: monopoly pricing by export industries, revenue‐replacement costs and cold‐shower effects. The theoretical formulas accurately explain results from MONASH, a detailed computable general equilibrium model. A critical parameter in determining the optimal tariff is the export‐demand elasticity. Modellers are often reluctant to adopt empirically justifiable values for export‐demand elasticities because such values generate embarrassingly large optimal tariff rates. A way out of this dilemma is the adoption of a non‐linear cold‐shower specification.
ISSN:0013-0249
1475-4932
DOI:10.1111/j.1475-4932.2009.00599.x