Tariffs and Production Subsidies for Income Redistribution

University of Michigan WP #391

29 Pages Posted: 2 Feb 1998

Date Written: 1996

Abstract

This paper shows that tariffs and production subsidies can Pareto-improve welfare in a small open economy when a government is concerned with income redistribution under asymmetric information. In international trade theory, free trade is optimal if the government can use lump-sum taxes and transfers. However, in reality the government cannot rely on those policy instruments due to asymmetric information between the government and individuals. In this case, the government needs to use a progressive income tax system for income redistribution. This paper shows that tariffs or production subsidies can Pareto-improve welfare even if the government uses a Pareto-optimal progressive income tax system under free trade. That is, tariffs and production subsidies complement a Pareto-optimal progressive income tax system.

JEL Classification: H21, F13

Suggested Citation

Naito, Hisahiro, Tariffs and Production Subsidies for Income Redistribution (1996). University of Michigan WP #391, Available at SSRN: https://ssrn.com/abstract=53280 or http://dx.doi.org/10.2139/ssrn.53280

Hisahiro Naito (Contact Author)

University of Tsukuba ( email )

Tennodai 1-1-1
Tsukuba City, Ibaraki Prefecture
Japan
81-29-853-7431 (Phone)