Optimal production tax and quota under time consistent trade policies

This article investigates the policy active importers' incentives and welfa re implications of using production and trade policies in a dynamic framewo rk where production decisions occur before consumption decisions. We show t hat the equilibrium for production taxes and quotas are not equivalent, and that each equilibrium depends on whether the trade policy instruments are tariffs or quotas. Under import quotas, the equilibrium policy is to tax do mestic production, whereas under a tariff either a production tax or subsid y may be optimal. We also show that a collective agreement to ban productio n policies is likely to be welfare-improving in many circumstances.