Munich Personal RePEc Archive

Tariffs that may fail to protect: A model of trade and public goods

Biswas, Rajit (2014): Tariffs that may fail to protect: A model of trade and public goods.

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Abstract

This paper develops a model of small open economy, with a differentiated goods sector and voluntary provisioning of public good. It is shown that trade policy can alter the quantity of public good provided in the equilibrium. Interestingly, tariffs may fail to protect, leading to a Metzler Paradox like situation. This is because the income effect generated due to the imposition of tariff can lead to an increase in the contribution to the public good. An expanding public sector crowds out the import competing sector. This result holds unambiguously in the neighbourhood of free trade.

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