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 TA ≡ tA/(1 + tA) of agricultural consumption expenditure as revenues.
For the only reason of notational simplicity in the following the gross tax TA
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:
P=
P* =
L + (1—LT .
Θ*
(3)
L Г-ïï + (1 - L)
with: Θ = (1 — TI)στ1-σ, Θ* = (1 — TI*)στ1-σ.
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