The structure of Nash equilibrium tariffs (Q453211)

The paper is devoted to the optimal tariff problem that arises in international trade between two countries. The optimization criteria for both countries are being taken welfare that is understood as a well-behaved utility function of a country's representative consumer. There are \( n+1\) traded goods numbered from \( 0 \) to \( n \). The first country (home) exports to other country (foreign) good \( 0 \) and imports from the second country goods \( 1,\dots,n \). Variables of a used general equilibrium model are prices and tariffs connected with the goods, and welfare levels of the countries. Each good \( i \) has three prices: the domestic price of the home country \( q_i \), that of the foreign country \( q^{*}_i \), and the world price \( p_i \). Each good is traded under tariffs \(t_i\) of the home country and \(t^{*}_i\) of the foreign country. Correspondingly, \( q_i = t_i + p_i\) and \( q^{*}_i = t^{*}_i + p^{*}_i\). The economies of the countries are represented via compensated excess demand functions \( z_i(q,u)\) and \( z^*_i(q^*,u^{*})\) where \( (u,u^{*}) \) are the welfare levels of the countries. The tariff problem is considered as a non-cooperative game. The author is obtained a condition under which the Nash equilibrium tariff rates are uniform in both countries, and explored the relative size of the rates when the condition is not fulfilled. The obtained results are expressed through the elasticities of compensated excess demand with respect to the prices.