Optimal Tariff Theory

Discipline: Economics

Originating in the work of English economist CHARLES BICKERDIKE (1876-1961), optimal tariff theory illustrates that it is possible for a country to improve its terms of trade by imposing a tariff or tax on certain imported goods.

The effect of optimal tariff is, ceteris paribus, a fall in demand for the taxed good; the country thus conducts a smaller level of trade on more favorable terms. The optimal is reached when the gain from the better terms of trade offsets the losses from the smaller volume of trade.

Source:
C F Bickerdike, 'The Theory of Incipient Taxes', Economic Journal, vol XVI (December 1906), 529-35; W M Corden, Trade Policy and Economic Welfare (Oxford, 1974)

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