The Consumer Tax Equivalent of a Tariff with Imperfect Substitutes.

In estimating the Consumer Tax Equivalent (CTE) and Producer Subsidy Equivalent (PSE) of a tariff it is often assumed that the imported good is a perfect substitute for the relevant locally made good. However, in evaluating the economy-wide effects of a change in tariff using general equilibrium models, it is common to assume that the imported good is an imperfect substitute (so-called Armington assumption). This paper estimates CTE assuming imperfect substitution in order to be consistent with the assumption commonly used in general equilibrium models. It shows how estimates of the GTE and PSE are sensitive to assumptions about the substitution elasticity of demand and the price elasticity of supply for the locally made good. Copyright 1999 by The Economic Society of Australia.