Definition of Optimum Tariff

An optimum tariff, or optimal tariff, is a tariff, or tax, designed for maximizing the welfare of a country. Optimum tariffs are found in international trade.

Purpose

An optimum tariff is designed to increase the wealth of a country. Tariffs are taxes levied by a country and charged for sales internationally. Tariffs increase the country's overall income. Often other countries retaliate by also charging an optimum tariff. In this case neither country really benefits through the imposition of optimum tariffs.

Considerations

Only large countries use optimum tariffs and benefit from them. Small countries with small economies do not have optimum tariffs. The tariff in this case is considered zero. Large countries using optimum tariffs, however, are considered to have a positive tariff because of the effect on trade.

Effects

While these tariffs were designed to increase a country's wealth, in reality this is true only when other countries do not raise their tariffs. A common effect is a decrease in demand for products offered by those countries.

References

• Umich: Deardorff's Glossary of International Economics
• The National Bureau of Economic Research: Optimal Tariffs: The Evidence
• Economy Professor: Optimal Tariff Theory