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Is free trade optimal for a small economy with tourism?

Jean-Pierre Laffargue 1, 2 Chi-Chur Chao 3 Bharat R. Hazari Eden S. H. Yu 4
1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics
3 The Chinese University of Hong Kong [Hong Kong]
4 CUHK - City University of Hong Kong [Hong Kong]
Abstract : We explore the welfare effects of tariffs and investment taxes for a small open economy in the presence of tourism. Inbound tourism converts local nontraded goods into tradable, generating a tourism terms-of-trade effect. Because of this favourable "expenditure-shifting" effect when goods are substitutes, increases in import tariffs and investment taxes can actually improve welfare of domestic residents. We establish that for a small open economy with tourism, free trade is not the first-best policy. The optimal rates of tariffs and investment taxes are then derived and simulated for the economy with tourism.
Keywords : Optimal investment taxes Optimal tariffs Tourism
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https://halshs.archives-ouvertes.fr/halshs-00645307
Contributor : Jean-Pierre Laffargue <>
Submitted on : Sunday, November 27, 2011 - 8:36:26 PM
Last modification on : Tuesday, January 19, 2021 - 11:08:50 AM

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Jean-Pierre Laffargue, Chi-Chur Chao, Bharat R. Hazari, Eden S. H. Yu. Is free trade optimal for a small economy with tourism?. Takashi Kamihigashi & Laixun Zhao. International Trade and Economic Dynamics. Essays in Memory of Koji Shimomura, Springer; Heilderberg, pp.49-62, 2008. ⟨halshs-00645307⟩

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