Optimal second-best tariffs on an intermediate input with particular reference to Pakistan

This is a theoretical and empirical study of trade policy in a small open e conomy with intermediate inputs. The first part develops a theoretical mode l and obtains expressions for optimal second-best tariffs on an intermediat e input when tax revenue is used to provide a public good and all other tax es are unalterable. In the second part, we estimate, for Pakistan, the opti mal tariff on sheet steel using the formula developed in the theoretical pa rt. We find that the current level of tariff is considerably higher than th e optimal one even after making generous allowances for government's revenu e constraint. (C) 2000 Elsevier Science B.V. All rights reserved. JEL class ification: Fl; O2; O5.