Revenue raising trade-restricting policies under uncertainty: The sub-optimality of the expected welfare criterion and some safety-first results

Abstract

The analysis of trade-restricting policies under uncertainty has typically argued in favour of the specific tariff over alternative commercial policies such as the ad valorem tariff and the quota, when the raising of revenue and maintenance of consumer's welfare are the policy objectives. This paper reconsiders this result. It is demonstrated that, when the shape of the welfare probability distribution is considered explicitly, the quota may be the dominant trade-restricting policy. In addition, the analysis of trade-restricting instruments is analysed for the case where the principle of safety-first is applied to the revenue-raising objective.