Optimal Distortions for a Small Country Facing Random Prices
Oxford Economic Papers, Vol. 37, No. 3, pp. 520-524, September 1985
Posted: 14 Dec 2009
Date Written: September 1, 1985
Abstract
It is well known that or a small open economy which is subject to no domestic distortions the optimal tariff is zero. Using this as their base model Jabara and Thompson [1982] now assume that the terms of trade facing this country are uncertain. They claim that if the terms of trade are uncertain it now becomes the case that the optimal tariff is not zero. However my paper shows that this is only the case if the income elasticity of demand for the importable good is zero.
Keywords: Distortions, optimal tariffs, terms of trade, income elasticity of demand
JEL Classification: E31, F13, F15
Suggested Citation: Suggested Citation