The optimal tariff for public good and public input provision
Date
1997Source
Public Finance ReviewVolume
25Pages
117-133Google Scholar check
Metadata
Show full item recordAbstract
It is well known that when tariff revenue is distributed to consumers as a lump sum, the optimum policy for a small country is free trade because a tariff reduces its welfare. Many less-developed countries, however, use tariff revenue to finance the provision of public goods or public inputs, such as technical training or infrastructure. This article builds a small open economy model with three private goods - one imported, one exported, and one nontraded - and where the government uses tariff revenue to finance the provision of a public good or input. Within this framework, the article derives the optimum tariff formulas and efficiency rules for public good and public input provision and compares the latter with the efficiency rules when the provision of public goods is financed with consumption taxes.