We explore the welfare effects of tariffs and investment taxes for a small open economy in the presence of tourism. Inbound tourism converts local non-traded goods into tradeable, 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.
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Chao, CC., Hazari, B.R., Laffargue, JP., Eden, S.H.Y. (2009). Is Free Trade Optimal for a Small Open Economy with Tourism?. In: Kamihigashi, T., Zhao, L. (eds) International Trade and Economic Dynamics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-78676-4_7
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DOI: https://doi.org/10.1007/978-3-540-78676-4_7
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