Energy tariffs in a small open economy

Abstract

Tariffs on imported energy alter production and redistribute income. The present paper examines a small open economy producing two traded goods with capital, labor, and imported energy. A tariff reduces import and domestic factor income but payment to one domestic factor rises. Energy intensive output falls but the other output may rise in the general equilibrium. Political opinions on the tariff would differ. Revenue is concave in the tariff suggesting that the government might set the tariff to maximize revenue. A simulation illustrates these general equilibrium properties across a range of tariffs.