J Austral Math Soc Ser B 34 pp133--152, 1992.

Welfare policy and multi-national monopolies

John Rickard, Allen Russell and Christine Martini

Abstract

This paper examines the role of import tariffs and consumption taxes when a product is supplied to a domestic market by a foreign monopoly via a subsidiary. It is assumed that there is no competition in the domestic market from internal suppliers. The home country is able to levy a profits tax on the subsidiary; the objective of our analysis is to determine the levels of tariff or consumption tax which maximise national welfare. Comparisons are made under the two alternative policies from the perspectives of national welfare, total national cost and average national cost. The major policy implication of the analysis is that a consumption tax is the more effective instrument for maximising national welfare provided the profits tax is less than a certain critical value; if the profits tax exceeds this value then a tariff, though in the form of a subsidy, is the most effective instrument. Our results complement, correct and extend an earlier analysis by Katrak (1977) [6].

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Authors

John Rickard

Graduate School of Management, Deakin University, Geelong, Victoria 3217.

Allen Russell

Department of Mathematics, The University of Melbourne, Parkville, Victoria 3052, Australia.

Christine Martini

Department of Accounting and Finance, The University of Melbourne, Parkville, Victoria 3052.