The Optimal Byrd Tariff in Vertical Markets

This paper develops the theory of the optimal tariff under the Byrd Amendment when producers are also processors. The optimal tariff in this case is equal to the optimal processor tariff (when the processor is not also a producer) and is smaller than the optimal producer tariff (when the producer is not also a processor). In a vertical market structure, the welfare of a producer/processor (P/P) increases if tariffs are imposed on raw product imports because a P/P keeps the tariff revenue under the Byrd Amendment. The P/P maximizes joint welfare under a positive Byrd tariff since the tariff allows the P/P to behave in a noncompetitive manner, but this is true only under competitive conditions. Under imperfect competition, the optimal Byrd tariff is zero.