The Impact of Optimal Tariffs and Taxes on Agglomeration

than intraregional income distribution, concerning the agricultural sector in
the following only taxes will be considered. If tA denotes the net tax rate
agricultural consumer prices are given by 1 + tA and government receives the
share T_A ≡ t_A/(1 + t_A) of agricultural consumption expenditure as revenues.
For the only reason of notational simplicity in the following the gross tax T_A
will be preferred.

The industrial sector consists of n domestic and n* foreign firms producing
each a differentiated variety x under increasing returns to scale. Trade of
varieties requires usual ”iceberg” trade costs τ≥1 according to Samuelson
(1954) implying that the export of the amount x* requires the shipment of the
amount τx*. Additionally, the importing domestic region may charge a gross
tariff on industrial imports TI such that consumer prices in the importing
region are τ(1 — TI)^-1 times the producer price p* of the exporting foreign
region.

On the costs side production of variety x requires fixed and variable costs.
Fixed costs stem from the fixed input of one skilled worker per firm each earn-
ing the wage w . This implies that the regional number of firms corresponds
to the regional skilled-labor supply given by L and (1 — L) in the foreign
region, respectively. Variable costs are given by the unskilled wage level of
unity and assuming the unit input of unskilled labor to be (σ — 1)7σ firms
costs are given by

C (x) = w + (σ — 1)∕σx.                      (2)

Individual firms are assumed to be too small to influence the aggregate price
level. Then, profit maximizing with respect to (1) and (2) yields a producer
price of p = 1 which is equal for all firms in the domestic region. Since
consumer prices differ by corresponding tariffs and other trade costs, prices
P, P* for the composites X and X* are given by:

L ^{+ (1—}LT .

Θ^*

L Г-ïï ^{+ (1 -} L)

with: Θ = (1 — TI)^στ^1-σ, Θ* = (1 — TI*)^στ^1-σ.

<<   6   7   8   9   10   11   12   >>

More intriguing information