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The Impact of Optimal Tariffs and Taxes on Agglomeration

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  • Matthias Ross

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    Abstract

    This paper extends an economic geography model by tariffs to analyze their impact on welfare and sustainability of agglomerations. Policies with and without cooperation are compared, with the goal of maximizing aggregated welfare in the former and regional welfare in the latter case. The main result is that under cooperation poorer regions are worse off in two respects. In the short-run they loose even more welfare and in the long-run sustainable agglomerations in richer regions get more likely. Thus, although cooperation could generate aggregated welfare gains the potential losers face even in the short-run no incentive to remove tariffs unless they are compensated appropriately, for instance by transfers. In this sense transfers from the rich to the poor are not only a policy to reach the goal of equity but also a necessary precondition to reach aggregated efficiency.

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    Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa03p102.

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    Date of creation: Aug 2003
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    Handle: RePEc:wiw:wiwrsa:ersa03p102

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    1. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2102, C.E.P.R. Discussion Papers.
    2. Fujita, M. & Thisse, J.-F., . "Economics of agglomeration," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1250, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
    4. OTTAVIANO, Gianmarco & TABUCHI , Takatoshi & THISSE, Jacques-François, . "Agglomeration and trade revisited," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1553, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 297-308, June.
    6. Gianmarco I. P. Ottaviano & Diego Puga, 1998. "Agglomeration in the Global Economy: A Survey of the 'New Economic Geography'," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 21(6), pages 707-731, 08.
    7. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
    8. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, Elsevier, vol. 22(1-2), pages 79-102, February.
    9. Gianmarco I.P. Ottaviano, 2000. "Ad usum delphini: A Primer in "New Economy Geography"," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 59(1), pages 89-116, April.
    10. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262561476, December.
    11. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, Elsevier, vol. 23(3-4), pages 357-367, November.
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