Option pricing theory (1906)

Originating in the work of English economist CHARLES BICKERDIKE (1876-1961), optimal tariff theory illustrates that it is possible for a country to improve its terms of trade by imposing a tariff or tax on certain imported goods.

The effect of optimal tariff is, ceteris paribus, a fall in demand for the taxed good; the country thus conducts a smaller level of trade on more favorable terms. The optimal is reached when the gain from the better terms of trade offsets the losses from the smaller volume of trade.

C F Bickerdike, ‘The Theory of Incipient Taxes’, Economic Journal, vol XVI (December 1906), 529-35; W M Corden, Trade Policy and Economic Welfare (Oxford, 1974)

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