The Impact of Optimal Tariffs and Taxes on Agglomeration

regions are worse off in two respects. They loose welfare even in the short-
run and worsen their comparative advantage such that sustainable income
differences in the long-run get more likely.

Monetary transfers may solve this trade off between equity and efficiency
by redistributing wealth from the richer to the poorer regions. If only the
welfare loss should be compensated relatively low transfers in terms of 1-2%
of regional income are sufficient. But, if transfers should guarantee also con-
vergence in the long-run, substantially higher transfers up to 30% of regional
income are necessary.

Combining these results transfers are not only an instrument of ’social
policy’ to reach the political goal of equity, but necessary during an integra-
tion process to make less developed regions removing their tariffs such that
an aggregated efficient distribution of economic activity is reached.

References

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Dixit, A. K. and Stiglitz, J. E. (1977), ‘Monopolistic competition and opti-
mum product diversity’, American Economic Review 67, 297-308.

Flam, H. and Helpman, E. (1987), ‘Industrial policy under monopolistic
competition’, Journal of International Economics 22, 79-102.

Forslid, R. (1999), Agglomeration with Human and Physical Capital: an An-
alytically Solvable Case, CEPR Discussion Paper No. 2102, London.

Francois, J., Glismann, H. H. and Spinanger, D. (2000), Germany and In-
dustrial Tariff Reductions: Partial and GE Analysis of What Didn’t
Happen in Seattle, Paper prepared for: The Third Annual Conference
on Global Economic Analysis - Practical Policy Analysis -, Centre of
Policy Studies, Melbourne, Australia.

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