ON THE REVENUE IMPLICATIONS OF TRADE LIBERALIZATION UNDER IMPERFECT COMPETITION

In a recent paper Mujumder (2004, Economics Letters) argued that only if the industry is a monopoly, we could be certain that the government could use profit tax to make up any shortfall in tariff revenue and also make the consumers and producers better off. We show that this result is not robust when the products are differentiated. We find that there always exists degree of product differentiation such that the government can achieve this goal for any finite number of firms. So, the picture is not so dismal as shown by Mujumder.