WELFARE OPTIMIZATION AND MULTINATIONAL MONOPOLIES

This paper examines the role of import tariffs and consumption taxes w hen a product is supplied to a domestic market by a foreign monopoly v ia a subsidiary. It is assumed that there is no competition in the dom estic 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 mix of tariff and consumption tax which simultaneously m aximizes national welfare. We show that national welfare does not have an internal maximum, but attains its maximum on a boundary of the con sumption tax-tariff parameter space. Furthermore, the optimal value of national welfare increases as the tariff decreases and the consumptio n tax increases. The results obtained generalize the results of an ear lier paper in which national welfare was maximized with respect to eit her a tariff or consumption tax, but not both.