Part 1 - AL-Tax

Chapter 15while the production set of the tradable good of country i I is:ϕ 1ϕi ii i ij j jY () t {y∈L : y≤k l ; y y l 0 for j i}.The technological parameters satisfy θ, ϕ (0,1).15.2.3 Government consumption and taxesGovernment i levies proportional taxes at rate τ ji on the imports from countryj i, at rate τ ii on the consumption of domestic goods and at rate τ li on laborincome. The government uses its fiscal revenue to purchase some amount g i of itscountry’s nontradable good.15.3 Competitive equilibriumA tax system for country j I is a vector τ j (τ aj ,τ bj ,τ rj ,τ uj ,τ lj ). An internationaltax system is an object τ (τ a ,τ b ,τ r ,τ u ). Each component of τ is a tax system for acountry. A price system for this economy is a vector:P (p at ,p bt ,p rt ,p ut ,p a ,p b ,p r ,p u ,w a ,w b ,w r ,w u ,r).We are abusing notation, since prices of nontradable goods from other countriesare infinite. This abuse makes our notation easier and homogeneous acrosscountries. The coordinates of P are before-tax prices. An after-tax price system fora country i is a vector:P (p ai ,p bi ,p ri ,p ui ,p an ,p bn ,p rn ,p un ,p al ,p bl ,p rl ,p ul ,r).The typical consumer from country i I solves the following problem:maxux ( ) s.t. P⋅≤x 0.x∈XiThe problem of a firm that produces the nontradable good in country i I is:max P⋅y,y∈Yi( n)while the problem of a firm that produces the tradable good in country i I is:max P⋅y.y∈Yi() ti345