THE OPTIMAL TARIFF FOR PUBLIC GOOD AND PUBLIC INPUT PROVISION

It is well known that when tariff revenue is distributed to consumers as a lump sum the optimum policy for a small country is free trade bec ause a tariff reduces its welfare. Many less-developed countries, howe ver use tariff revenue to finance the provision of public goods or pub lic inputs, such as technical training or infrastructure. This article builds a small open economy model with three private goods-one import ed, one exported, and one nontraded-and where the government uses tari ff revenue to finance the provision of a public good or input. Within this framework, the article derives the optimum tariff formulas and ef ficiency rules for public good and public input provision and compares the latter with the efficiency rules when the provision of public goo ds is financed with consumption taxes.