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Domestic Distortions And Trade Policy

In: Evolving Patterns in Global Trade and Finance

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  • SVEN W. ARNDT

Abstract

WHEN a country possesses monopoly power in the international markets in which it trades, a competitive free trade situation will be characterized by a disparity between the domestic and foreign rates of transformation. Achievement of an optimal solution requires that this disparity be eliminated in a manner which does not simultaneously destroy the equality between the domestic rate of substitution and the domestic rate of transformation. To this end, the theory of optimum tariffs provides a criterion for appropriate intervention in foreign trade by means of duties and subsidies on trade. A tax-cum-subsidy policy of intervention in domestic production, on the other hand, is not appropriate, because in removing the existing distortion it creates a new inequality between the domestic rate of substitution in consumption and the domestic rate of transformation. Consequently, a tax-cum-subsidy policy of intervention is necessarily inferior to an optimum tariff…

Suggested Citation

  • Sven W. Arndt, 2014. "Domestic Distortions And Trade Policy," World Scientific Book Chapters, in: Evolving Patterns in Global Trade and Finance, chapter 5, pages 71-80, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814603416_0005
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