HWWA DISCUSSION PAPER 212
December 2002
The Impact of Optimal
Tariffs and Taxes on
Agglomeration
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.
JEL-Classification: F13, H21, F42, R12, F15
Keywords: optimal tariffs, optimal taxation, policy coordination, economic geography,
economic integration
Matthias Ross
Universitat Hamburg
Von-Melle Park 5
20146 Hamburg
Telefon: 49(0)40-428385568
e-mail: Ross@hermes1.econ.uni-hamburg.de
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