Some General-Equilibrium Considerations for the Analysis of Oil Import Restrictions

Recent events in the oil market and the persistent U.S. government deficit have sparked renewed interest in a tax or a tariff on oil. I have argued elsewhere (Mork, 1985) for such taxation from the perspective of macroeconomic stability. However, quite often the argument is based on the simple static notion that an oil import tariff will soften the world oil market and improve the terms of trade. If M denotes oil import supply facing the home country and Me its own price derivative, this line of reasoning gives rise to the inverse-elasticity formula, by which the optimal tariff is given ast = M/Mr. (1)