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Productivity- and Pareto-Improving Changes in Taxes and Tariffs


  • W. E. Diewert
  • A. H. Turunen-Red
  • A. D. Woodland


The paper investigates the problem of tariff reform in a small open multi-household economy that only has tariffs and domestic commodity taxes as policy instruments. The concept of a productivity improvement in tariffs and taxes is introduced and conditions for its existence are established. We prove that a Pareto-improving change in tariffs and domestic taxes exists if a productivity-improving change in tariffs exists and if the Weymark condition on the matrix of household demands holds. Conditions are established for particular tariff reforms, such as proportional reductions and reductions of extreme rates, to yield Pareto improvements in welfare.

Suggested Citation

  • W. E. Diewert & A. H. Turunen-Red & A. D. Woodland, 1989. "Productivity- and Pareto-Improving Changes in Taxes and Tariffs," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 199-215.
  • Handle: RePEc:oup:restud:v:56:y:1989:i:2:p:199-215.

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    References listed on IDEAS

    1. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-113, May.
    2. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
    3. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
    4. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 703-725.
    5. Matsukawa, Shigeru, 1986. "The Equilibrium Distribution of Wage Settlements and Economic Stability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 415-437, June.
    6. Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money," NBER Working Papers 1770, National Bureau of Economic Research, Inc.
    7. Fethke, Gary & Policano, Andrew, 1984. "Wage contingencies, the pattern of negotiation and aggregate implications of alternative contract structures," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 151-170, September.
    8. Laurence Ball, 1988. "Is Equilibrium Indexation Efficient?," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 299-311.
    9. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
    10. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
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