TARIFF PROTECTION IN AN OPEN SPATIAL ECONOMY*

Abstract

ABSTRACTSpatial pricing models have been used to illustrate a tariff's asymmetric effects on consumers located at different points in the protected economy, and to demonstrate that the optimum tariff for a small open spatial economy may be positive. In these models, the distribution of households has been taken as uniform and fixed.We extend the spatial model by allowing households to optimally locate and consume variable amounts of land, as well as the domestic‐ or foreign‐produced good. Land consumption, location rents, and the distribution of consumers are endogenous, responding to tariff‐induced changes in the delivered prices of the domestic and foreign goods. Within this limited general equilibrium framework, a neoclassical result resurfaces: from the perspective of private consumers, the optimum tariff in a small open economy is zero. The possibility of a positive optimum tariff, however, may remain intact in a more integrated model where domestic profits and tariff revenues are redistributed within the spatial economy.