Optimal Trade Policies for a Developing Country under Uncertainty

E. Kwan Choi, Harvey E. Lapan
July 1991  [90-GATT 8]

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Choi, E.K. and H.E. Lapan. 1991. "Optimal Trade Policies for a Developing Country under Uncertainty." CARD paper 90-GATT 8. Center for Agricultural and Rural Development, Iowa State University.


This paper investigates optimal trade policies for a developing, small open economy that faces international price uncertainly. Trade taxes are used to finance provision of a public good, which enters the utility function of consumers. If demands for private goods are independent of the public good, the optimal composite tariff dominates the optimal quota. If the optimal state-contingent tariff increases with the foreign price, the optimal specific tariff also dominates the optimal quota, regardless of risk aversion. However, the ranking of the optimal specific tariff and the optimal quota generally depends on risk attitudes as well as ordinal preferences.