Optimal Policy in the Presence of Licensed Technology from Abroad

Abstract

This paper extends the theory of international trade to analyze optimal commercial policy of a country importing technology for which royalties must be paid to foreigners. As the analysis shows, the country can maximize national welfare by combining a tax on international trade in commodities and a domestic commodity-market tax or subsidy, depending, respectively, on whether foreigners are net exporters or importers of the commodity whose technology is licensed internationally. The analysis also demonstrates that the maximum level of national welfare might be lower with than without technological imports, if the country's exportable commodity uses the foreign technology.