Welfare optimization and multinational monopolies

Abstract

AbstractThis paper examines the role of import tariffs and consumption taxes when a product is supplied to a domestic market by a foreign monopoly via a subsidiary. It is assumed that there is no competition in the domestic market from internal suppliers. The home country is able to levy a profits tax on the subsidiary. The objective of our analysis is to determine the mix of tariff and consumption tax which simultaneously maximizes national welfare. We show that national welfare does not have an internal maximum, but attains its maximum on a boundary of the consumption tax–tariff parameter space. Furthermore, the optimal value of national welfare increases as the tariff decreases and the consumption tax increases. The results obtained generalize the results of an earlier paper in which national welfare was maximized with respect to either a tariff or consumption tax, but not both.