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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.

Suggested Citation

  • Matthias Ross, 2003. "The Impact of Optimal Tariffs and Taxes on Agglomeration," ERSA conference papers ersa03p102, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa03p102
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    File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa03/cdrom/papers/102.pdf
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    References listed on IDEAS

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    8. 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, vol. 23(3-4), pages 357-367, November.
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    11. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers.
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