| Trade taxes are inferior, on efficiency grounds, to other means of taxation. This result is true whether the underlying motive is protection or the raising of revenue. Trade theorists have devoted a great deal of attention to the former motive but very little to the use of trade taxes for financing government activities. This thesis examines the important normative issues associated with that second motive.;The theoretical framework is a small open economy with two traded goods and two inelastically supplied primary factors of production. To this is added a third non-traded good, either the public good or the public input, which is to be financed by a specific tariff. Then rules for optimal provision are derived for the public good/input under conditions of both private sector and public sector production. Implicit in each rule is the associated optimal revenue tariff.;These rules are investigated in some detail. Observations are made regarding the role of factor intensity rankings. For the case of public inputs, comparisons are made with the "conventional rules" of Atkinson and Stern (1974). When production is undertaken by the public sector, the resulting rules embody shadow prices for factors. These shadow prices are related to the literature. Moreover, a subsidiary aspect of this work is elaboration, generalization and clarification of the theory of public inputs.;We start with reliance on an import tariff as a given and focus on the formation, in a second best sense, of optimal tariff policy. To do so, in a meaningful way, requires the specification of the use to which government revenue is to be put. One obvious possibility is to finance production of a public good. Another is to pay for production of a public input, an intermediate input which is collective to firms' production functions for private goods. The formation of tariff policy is considered for each of the public good and public input when produced by the private sector as well as when produced by the public sector. |
