Public Economics Lectures Part 1: Introduction

Policy Consequences: Tariffs
In open economy, the production set is extended because it is possible
to trade at linear prices (for a small country) with other countries
Diamond-Mirrlees result: small open economy should be on the
frontier of the extended production set
Implies that no tariffs should be imposed on goods and inputs
imported or exported by the production sector
Ex. sales of IBM computers to other countries should be untaxed
Ex. purchases of oil by oil companies should be untaxed
Ex. should be no special tariff on imported cars from Japan, but
should bear same commodity tax as cars made in US
Public Economics Lectures () Part 4: Optimal Taxation 47 / 121