ABSTRACT
This chapter deals with the welfare effects of trade taxes. It also deals with the effects of import and export subsidies. The chapter discusses the effects of quantitative restrictions. Since the existence of trade taxes gives rise to divergence between the domestic price ratios of the two countries, their marginal rates of transformation must necessarily be different. The fact that the imposition of trade taxes implies that the world is definitely operating inside the world utility-possibility frontier. Trade subsidies are merely negative trade taxes. The effects of export and import quotas are identical to those of trade taxes. When a trade tax is imposed, the relative and absolute incomes of the tax-imposing country’s factors of production are affected in two ways: through the change of the domestic price ratio and the resultant reallocation of resources, and through the redistribution of the tax revenue by the government.
