Taxes versus quotas : the case of cocoa exports

The authors are particularly interested in evaluating the concern that efficiency or policy-induced changes in the supply of exports of primary commodities, such as cocoa, coffee, and tea, may lead to such a large decline in the prices of those commodities that export revenues and incomes of the exporting countries actually decline. This paper focuses on the implications of quantitative restrictions. It compares the implications of optimal Nash quotas and taxes when two or more countries compete against each other in the world market and finds that the outcome under taxes is less restrictive than under quotas but that the countries'profits are higher under quotas than under taxes. In simulations undertaken for the world cocoa market, it finds that for most countries optimal Nash taxes yield lower profits than the initial taxes or quotas. It also finds that even if countries choose taxes or quotas optimally, growth in a country can lead to a decline in the combined real income of the exporting countries. The simulations also cast doubt on the hypothesis that a market with five or more players can be regarded as roughly perfectly competitive.