The Impact of Optimal Tariffs and Taxes on Agglomeration



Parameters: γ = 0.5, σ = 4

Figure 3: Domestic optimal tariffs and real income gain under cooperation

At the symmetric equilibrium (L=0.5) all optimal tariffs are zero while to
the right and to the left optimal tariffs are becoming positive and negative,
respectively. This result is mainly a consequence of the trade costs and the
corresponding different price levels in both regions. The more developed a
region is, the lower the price level and from this perspective rent creating
tariffs improve welfare by more in the developed region than they reduce
income in the poorer region. From the perspective of the less developed
region argumentation is exactly opposite. Although import subsidies reduce
domestic welfare, foreign welfare compensates this loss by additional earnings
of the exporting firms. Furthermore, the lower the trade costs the smaller
are the corresponding tariffs. In case of full integration with zero trade costs
optimal tariffs are even zero and the corresponding curve in figure (3) overlaps
the x-axis. Thus, only if trade costs differ from zero the home market effect
can be existent and optimal tariffs of (15) maximize aggregated welfare.

Concerning the welfare gain (right graph) the interesting results arrives
that a region my gain by cooperation only if its level of development is
high enough, more precise if
L > LC . Because of symmetry both regions
gain only if
LC < L < 1 - LC . As in the non-cooperation case LC shifts
leftwards as integration proceeds such that corresponding losses of the less
developed region melt away. Thus, welfare gains in both regions as a result of
cooperation are the more likely, the less unequal regions are and the further

13



More intriguing information

1. The name is absent
2. Sectoral specialisation in the EU a macroeconomic perspective
3. Individual tradable permit market and traffic congestion: An experimental study
4. GOVERNANÇA E MECANISMOS DE CONTROLE SOCIAL EM REDES ORGANIZACIONAIS
5. Meat Slaughter and Processing Plants’ Traceability Levels Evidence From Iowa
6. Tastes, castes, and culture: The influence of society on preferences
7. Towards a Mirror System for the Development of Socially-Mediated Skills
8. Economies of Size for Conventional Tillage and No-till Wheat Production
9. Effort and Performance in Public-Policy Contests
10. The name is absent
11. The name is absent
12. How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany
13. Une nouvelle vision de l'économie (The knowledge society: a new approach of the economy)
14. Competition In or For the Field: Which is Better
15. Measuring and Testing Advertising-Induced Rotation in the Demand Curve
16. Gender and headship in the twenty-first century
17. EMU's Decentralized System of Fiscal Policy
18. Do imputed education histories provide satisfactory results in fertility analysis in the Western German context?
19. BUSINESS SUCCESS: WHAT FACTORS REALLY MATTER?
20. Ruptures in the probability scale. Calculation of ruptures’ values