In the presence of a perfectly competitive market, a tariff cannot reverse trade flows. The imposition of a nonprohibitive tariff on an imported commodity merely reduces the volume of imports. The levy of a prohibitive duty eliminates trade; it does not cause the good to be exported. However, in the presence of a single domestic producer, the levy of a tariff on an imported commodity may lead the economy to begin exporting the commodity. In this paper I explore this latter case, examining also the welfare implications of such a tariff. Consider an economy which, under free trade, imports a given commodity that is also supplied domestically by a single producer. All other markets are assumed to be perfectly competitive. The economy is assumed to be a price taker in the world market for this good; hence, the domestic producer is confronted with international competition in perfectly elastic supply. In Figure 1, Pw is taken to be the world price of the good;' D represents the (real income constant) domestic demand for the good; MR represents the marginal revenue derived from D; and MC depicts the producer's marginal cost. Under free trade, the domestic price equals the world price. The producer's output Of 0Q2 units is sold domestically, and imports are Q2Q6 units. If a tariff rate of t, is imposed on imports, the domestic price increases to (1+t,)PW. The producer's output increases to oQ3 units and domestic consumption declines to oQ5 units. The government is the recipient of tariff revenue equal to t,Pw multiplied by Q3Q5. Although the profits of the producer's increase and additional revenue accrues to the government, together they are less than the loss in consumers' surplus. Accordingly, domestic welfare declines as a consequence (1 + t4)PPw MC

Frank J. Fabozzi, Richard R. West, Negotiated Versus Competitive Underwritings of Public Utility Bonds: Just One More Time, The Journal of Financial and Quantitative Analysis, Vol. 16, No. 3 (Sep., 1981), pp. 323-339

J. H. Makin, The Numeraire Problem and Foreign Exchange Risk: Discussion, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 440-442