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Domestic Distortions, Tariffs, And The Theory Of Optimum Subsidy: Some Further Results, Jagdish N. Bhagwati, V.K. Ramaswami, T.N. Srinivasan
Domestic Distortions, Tariffs, And The Theory Of Optimum Subsidy: Some Further Results, Jagdish N. Bhagwati, V.K. Ramaswami, T.N. Srinivasan
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Bhagwati and Ramaswami (1963) showed that if there is a distortion, the Paretian first-best policy is to intervene with a tax (subsidy) at the point at which the distortion occurs. Hence a domestic tax-cum-subsidy with respect to production would be first-best optimal when there was a domestic distortion (defined as the divergence between domestic prices and the marginal rate of transformation in domestic production) just as a tariff policy would be first-best optimal under monopoly power in trade (which involves a foreign distortion). An important corollary, for the case of a distortionary wage differential, is that while a tax-cum-subsidy policy …