This is a theoretical and empirical study of trade policy in a small open economy with intermediate inputs. The first part develops a theoretical model and obtains expressions for optimal second-best tariffs on an intermediate input. In the second part, we estimate, for Pakistan, the optimal...

We examine the potential for further reform of sales tax and tariffs on final goods and on intermediate inputs in Pakistan. Analysis is conducted at two levels. First, optimal taxes are computed under the assumption that tax revenue is exogenous and pays for a public good, and these are compared...