A trade and domestic tax reform in imperfectly competitive markets

Abstract

This paper develops a model of an export oligopoly to examine the welfare effects of an export tax reduction and a production tax increase that makes the foreign country no-worse off. Whether or not entry into the oligopolistic industry is free, the proposed policy reform is shown to reduce welfare of the policy-implementing country and the world. Relating this result to the perfectly competitive case, we closely discuss its implications.

Keywords:

• welfare
• export tax
• production tax
• restricted entry
• free entry

JEL Classifications:

• F12
• F13

Acknowledgements

We thank two anonymous referees for a number of useful comments and suggestions. Any remaining error is our own.

Notes

1. See IMF (2005) for comprehensive evidence.

2. Piermartini (2004) and Solleder (2012) survey the recent literature on the effects of export taxes.

3. See, among others, Hatzipanayotou, Michael, and Miller (1994) and Keen and Ligthart (2002) both of whom prove that a point-by-point tariff reduction associated with a consumption tax increase improves both welfare and government revenue for a small open economy. Keen and Ligthart (2005) show that this result no longer survives imperfect competition.

4. Our model is inspired by Ishikawa (2000, 2004), Ishikawa and Kuroda (2007) and Ishikawa and Mukunoki (2008a, 2008b).

5. Markusen and Venables (1988) and Brander (1995) clearly suggest this in a context of strategic trade policies. Haufler, Schjelderup, and Stahler (2005) and McCracken and Stahler (2010) also address how free entry into the oligopolistic industry affects the debate over consumption versus production taxation in open economies.

6. All the results in this paper are valid even if inverse demand is defined by the world price p ^W rather than the Home consumer price p. The proof is available from the authors upon request.

7. If t is negative, it represents an export subsidy. This case is briefly addressed in Section 4.

8. If c′′ is too negative, the foregoing argument may be invalid. However, the main results in this paper are valid regardless of the sign of c′′.

9. See Ishikawa (2000, 2004), Ishikawa and Kuroda (2007) and Ishikawa and Mukunoki (2008a, 2008b) who study how the sign of c′′ affects the policy effects.

10. We assume a two-country, two-good model while the existing literature on tariff reforms usually employs a multi-good model.

11. The detailed proof is available from the authors upon request.

12. This inequality is called a Hatta Normality Condition after Hatta (1977a, 1977b).