ABSTRACT
The theory of commencai policy is enlarged by the presence of uncertainty in at least three new dimensions. The effects of policy on the risk-spreading opportunities available to the domestic market, the use of monopoly power in risk markets, and the effect of policy on foreign ownership income (international income distribution effects) are new components which must all be taken into account. Just as an optimal tariff on commodity trade for a large country may improve welfare, so an optimal tariff or tax on foreign capital flows (equity trade) can be used to improve domestic welfare. It is possible that a small country in commodity markets will still gain from a optimal tariff on equity trade. If the opening of trade is not welfare improving because risk-spreading opportunities are reduced, then a tariff employed to restrict trade can act as a partial insurance mechanism to improve welfare. Finally, if countries are linked by international financial flows policy must be re-evaluated. A traditional optimal tariff which achieves gains at the expense of a trading partner whose assets are partly owned by domestic investors may no longer be appropriate since it implies using monopoly power against the assets of home country citizens. Gains in current terms-of-trade advantages must then be weighed against gains (or losses) in foreign assets.
