Optimal Tariffs on Exhaustible Resources in the Presence of Cartel Behavior

Abstract

We present a model of bilateral monopoly between resource-importing countries and a resource-exporting country. We show that there exists a threshold level of marginal cost beyond which the resource-importing coalition would prefer bilateral monopoly to free trade. In the case of two non-collusive asymmetric importing countries, we show that asymmetry of market sizes also plays a role in determining the welfare gains under free trade or tariff war. As importing countries become more asymmetric, their aggregate welfare is more likely to be higher under the tariff war.