Abstract
An open economy facing a domestic distortion may be able to increase its welfare by imposing an additional distortion on foreign trade in the form of an import tariff. The tariff level which will achieve a second best welfare maximum is discussed for two cases: first, when the tariff revenues are simply redistributed and second, when the tariff revenues are used to subsidize the distorted sector. The optimal tariff in both cases is less than the tariff which would completely eliminate the production effects of the domestic distortion. It has been pointed out that the latter tariff policy might result in lower real income than in the absence of a tariff.
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