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A Dynamic Model for an Optimal Specific Import Tariff

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  • Nawaz, Nasreen

Abstract

The existing literature on optimal specific import tariff only compares the pre and the post-tariff market equilibriums in order to account for the efficiency losses or gains. However, when the government imposes a tariff, the foreign producer's cost (to the extent of his/ her exports) jumps to the pre-tariff cost plus the amount of specific tariff affecting the import quantity and hence pushing the market out of equilibrium. The supply and the demand of the commodity on which a tariff is imposed then adjust over time to bring the new post-tariff market equilibrium. The price adjustment mechanism is based on the fact that when the imposition of a tariff leads the market out of equilibrium, the buyers' and sellers' decisions are not coordinated at the current prices. The existing literature does not take into account the efficiency losses during the adjustment process while computing the optimal specific import tariffs. This paper develops a dynamic model and derives an optimal specific import tariff path minimizing the efficiency losses (output and/ or consumption lost) during the dynamic adjustment process as well as the post-tariff market equilibrium subject to a tariff revenue constraint.

Suggested Citation

  • Nawaz, Nasreen, 2017. "A Dynamic Model for an Optimal Specific Import Tariff," MPRA Paper 117494, University Library of Munich, Germany, revised 17 Dec 2019.
    • Handle: RePEc:pra:mprapa:117494
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    References listed on IDEAS

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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