Essays in Honour of Peter Lloyd, Volume I
Edited by Sisira Jayasuriya
Chapter 3: Are uniform tariffs optimal?
49 upstream and downstream industries, that are vertically linked through an input–output structure; and a perfectly competitive ‘agricultural’ industry, with constant returns to scale technology, employing labour and capital. Upstream ﬁrms produce intermediate inputs, using labour and capital, which they sell to ﬁrms in the downstream industry. Downstream ﬁrms combine intermediate inputs with labour and capital to produce ﬁnal manufacturing goods, which they sell to consumers. The market structure in each of the vertically linked industries is assumed to be Chamberlinian monopolistic competition: there are many ﬁrms in both industries, each employing increasing returns to scale technology and producing diﬀerentiated goods. Each ﬁrm can choose to locate in either country and it draws on the labour and capital available in the country in which it locates. Trade costs are modelled as tariﬀs and real resource costs. Tariﬀ rates can diﬀer between upstream and downstream ﬁrms. We include positive real resource costs throughout the analysis for two reasons. One is that production patterns are indeterminate if all trade costs are zero because the number of industries is greater than the number of factors. Two, allowing for real resource costs in transporting goods highlights that even if we can reduce tariﬀ rates to zero we cannot reduce the cost of shipping goods between countries to zero and these real resource costs aﬀect location. Utility We present the model for country l and note that symmetric equations hold for country k. All subscripts denote the country and superscripts...
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