The optimal tariff structure and foreign penetration

Abstract

This study investigates tariff policies as a means of improving economic welfare. The government sets the tariff so as to maximize domestic welfare against foreign penetration. We examine the relationship between the optimal tariff structure and the degree of penetration. We find that the optimal tariff rate is non-monotonically related with the degree of penetration (inverse U-shape). We also show that intermediate degrees of foreign penetration are harmful for economic welfare.