This article examines the relative merits of tariffs and quotas as revenue raising devices in the presence of economic uncertainty. It has long been recognized that, provided the government auctions off the quota, the optimum pure tariff and the optimum pure quota are equivalent in a competitive world with no uncertainty. However, in such a world the equivalence is between a pure tariff and a pure quota that are both functions of the state of nature. The border policies that are most commonly resorted to by governments are fixed tariff rates and fixed quantity restrictions. They are often regarded as polar forms of trade restrictions. They have different very different effects: a fixed tariff on a commodity stabilizes its domestic price in the face of random domestic demand and supply but a fixed international price; while a quota stabilizes its domestic price if its international price is random but its domestic demand and supply functions are fixed. Results of the study reveal that under the conventional criterion of maximizing the expected value of net consumer's surplus, the optimum fixed tariff is superior to the optimum fixed quota. The result continues to hold if instead the maxi-min criterion is followed.

This paper extends the theory of optimal taxation and government production to open economies. Appropriate rules for project evaluation and the determination of consumption, production, and trade taxes under a variety of restrictions (e.g., less than 100 percent profit taxes, government budget constraint, foreign exchange constraint) are derived. Among the results are (a) international prices should be used for evaluating public projects, unless there is a government budgetary constraint or there is a quota (this result does not require that tariff rates be optimally chosen); (b) no tariff should be levied on intermediates and only consumption taxes should be employed if there are 100 percent profit taxes. If profits are not taxed at 100 percent, both consumption and trade taxes should be employed.

[Strategic considerations may induce a resource importing country to invent a substitute earlier than it intends to put it to use. There are also circumstances in which it would wish to delay an invention date even if it could obtain it at an earlier date at no extra cost. Similar paradoxical results obtain if resource cartels behave strategically. Setting prices high may be a way of deterring invention. If those engaged in R & D are not resource users, and the cartel has access to similar R & D technology, it will pre-empt rivals. This may not be the case if resource users can also engage in R & D.]

This paper examines the interactions between market structure and resource allocation over time when there is endogenous technical progress. The structures considered are a planned economy, pure monopoly, and competition with patent rights. In an efficient allocation the date of invention coincides with the date of innovation (the date at which technology is used). This is also true with a pure monopoly, but monopoly retards technical progress relative to the efficient level. Competition for patents rights to a new technology results in excessively rapid technical progress if the resource endowment of the economy is sufficiently large. Also, competition may lead to “sleeping patents” where invention strictly precedes the date of innovation.