Monopoly, Trade and Tariff Redundancy

Monopoly, Trade and Tariff Redundancy

The effects upon trade of protecting a domestic monopoly are analyzed formally, under conditions of both certainty and uncertainty in the exchange rate, by casting the firm`s problem as one in the general format of constrained optimization. Existing studies assuming exchange rate certainty typically engage a diagrammatic approach, depicting a linear demand curve; the formal analysis presented here, involving non-differentiable methods of Lagrangean analysis, in particular identifies a scenario which has been “missed” in this previous work. In case of uncertainty in the exchange rate, under certain simplifying assumptions we can show that the probability of tariff redundancy is increasing with the level of protection, and also determine the comparative static effect of increased uncertainty on this probability and upon expected tariff receipts. The analytical structure developed here should lend itself in the future to such refinements as the introduction of a competitive domestic fringe. (`JEL classification: F13, L12)