A computable general equilibrium analysis of export taxes in the Australian wool industry

We solve for Australia's optimal export tax on wool using a computable general equilibrium model an aggregated version of the Monash model. A key aspect of the analysis is the way in which we model short-run and long-run comparative statics. As opposed to varying the Armington elasticity which measures the degree of substitutability between domestic and imported goods, we contrast the unrestricted movement of primary factors of production with a specific factors representation. We find that while results are virtually unchanged for the range of Armington elasticity values we employ in our sensitivity analysis, the specific factors specification has a significant impact on model results. In addition, we provide an explanation for why there are differences between our optimal export tax results and those generated by the Johnson [Johnson, H.G. (1965), Optimum Tariffs and Retaliation, in International Trade and Economic Growth, London: George Allen & Unwin Ltd., pp.31-61.] inverse elasticity formula. These results indicate that it is necessary to be cautious when interpreting optimal export tax estimates based on the Johnson inverse elasticity formula. (C) 2007 Elsevier B.V. All rights reserved.