2.4 - additional theory for geographically discriminatory TP

Cooper-Massel proposition

Under standard 1st best assumptions, there is always a non-geographically discriminatory TP that is superior welfare-wise (or strictly not inferior) to any form of RTA

• Even if RTA net TC

Welfare Comparison of ‘Equivalent’ Discriminatory and Non-Discriminatory Tariff

p^p > p^w p^h = p^w (1+t0) - ad-velorem

we choose a new multilateral tariff t < t0 that deilvers same level of dom production, C & TC as with a CU

• creating a CU decreases dom production + increases D

Welfare Comparison of ‘Equivalent’ Discriminatory and Non-Discriminatory Tariff - Net Welfare

Net welfare for CU = B+D-G

• No tariff revenue as tariffs eliminated

Net welfare of multilateral reduction = B+E+D+F

• B+E - Resource saving from displacement of dom production from M from RoW (q0 - q1)

• D+F - Additional benefit relative to cost of M from increasing C of M (d1-d2)

With multilateral tariffs, M come from lowest cost from RoW

• Only TC & no TD + tariff revenue from all M

E+F>-G → E+F+G > 0 Higher gains than with CU

X supply and Partner nation

Standard analysis assumes partner X to other CU member at constant cost - X Supply horizontal (Importer small in bloc)

• No welfare effects for partner as p^x = cost for each unit

However if X Supply upward sloping, X increase = p increase to cover MC

• generates PS gain for Exporter (not available from non-discrim TP)

Provides incentive for Exporting firms in Partner to join a CU

• Rent transfers from H → F provides some rationale for compensation sent back to H / Importer

Welfare in CU with X Supply upwards sloping - graph

Welfare in CU with X Supply upwards sloping - analysis

Initially A imposes MFN tariff (t) on M from B & C

• Shifts X Supply upwards

Equilibrium at price p^t_c M = M3 - M1

Compared to autarky welfare gain for A = KGS (CS) + 0 (PS) + GSNH (Tariff)

Forming a CU between A & B removes tariff from B X Supply

• Bs X increases (M1→M2) & Cs fall (M3-M1 → M3-M2)

• Pure TD so CU is welfare worsening

  • Tariff revenue lost → GFUH captured by B producers (Bs TOT gains in CU)

  • FUL = deadweight loss