Rent-Extracting Tariffs and the Management of Exhaustible Resources

Abstract

This paper examines the interaction between a resource-exporting and a resource- importing country. The exporting country must choose the optimal rate of depletion of an exhaustible resource and also must decide on the allocation of the extracted resource between exports and domestic use. Optimal management from a national point of view entails inefficiency from a global perspective in that too little resource is exported as the supplying country exploits its monopoly power. The importing country, however, has an incentive to extract some of the resource rent by using a tariff, although rent extraction is limited by the exporter's ability to use the resource domestically. The optimal tariff is positive and induces greater overall inefficiency.

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