Dynamically Consistent Oil Import Tariffs

Larry Karp and David M Newbery

Canadian Journal of Economics, 1992, vol. 25, issue 1, 1-21

Abstract: The standard solution of the open-loop optimal import tariff is normally time inconsistent. This paper shows why and derives the dynamically consistent Markov perfect tariff. The two tariffs are compared; they differ except for a special class of import demands. The time paths of tariffs and the welfare cost of an inability to commit are calculated for a dominant importer. The welfare costs of the inability to commit are small if its market share is below one-half.

Date: 1992
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