This indicates that the government must take necessary measures to limit or reduce the extent of criminal activities within the economy. This can occur through legalization of human smuggling while tightening the rules and regulations governing property or product smuggling.
Smuggling and Price Disparity Model
In the Bhagwati and Hansen Model (Bhagwati-Hansen Model), smuggling is a trade at the world or international prices. This indicates that there is evasion of taxes. This trade involves less favorable transformation curve in comparison to curves under the free trade condition in the absence of the taxation system. This is under the assumption that smuggling involves real cost such as additional transport costs. In their illustration of smuggling and welfare, Bhagwati and Hansen indicate that smuggling has negative effects on welfare. This illustration explains that smuggling reduces welfare in the presence of co-existence between legal and illegal trade (smuggling). Bhagwati and Hansen explain that non-smuggling situation in the presence of legal and illegal transactions have the effect of promoting or enhancing welfare within the society. This is application in any characterization of smuggling (constant or increasing costs). Coexistence of legal and illegal transaction characterizes real world smuggling situations or conditions. This indicates how crucial it is to adjust economic rules to reduce the extent of smuggling within the economy. The government has the opportunity to maximize economic welfare by strictly by initiating sub-optimal taxation systems on transactions or trade rather than promoting some evasion. These conclusions are not in accordance with the findings of smuggling and price disparity model.
Figure 1 illustrates the presence of maximum or greater welfare in the existence of smuggling conditions. Figure 2 illustrates the presence of lesser welfare in the smuggling situation, in comparison to legal trade situation (non-smuggling condition). The non-smuggling condition, there is the production at Pt. At this point, taxation is inclusive of the price thus the tangent existence to the production possibility curve AA1. There is transaction or trade at international prices PtCt thus, the existence of welfare at Ut. In the presence of smuggling or illegal transactions, production occurs at Ps. At point, the domestic relative prices are equal to the marginal rate of transformation in relation to production. There is the transformation of the smuggling-to-smuggling curve PsQsB from Ps until Qs. At this point, the smuggling transformation curve reflects tangency to the internal or domestic prices. Non-smuggling conditions allow the exchange at the international terms of trade QsCs with Us as the point of welfare
In the case where costs of smuggling to the traders include penalties and confiscation by the relevant authority, there would be minimal difference in the price and production equilibrium such as 2a and 2b in the figure 1 and figure 2. There is an assumption that smuggling costs reflects real resource costs of the country. Since the cost of smuggling to the smuggler or trader represents merely revenue to the government or relevant authority, the aggregate rate of transformation in the transaction is the free trade terms at PsCp in figure 1 and figure 2. This results into the welfare level being Up>Us. This result indicates that smuggling has an unambiguous gain in welfare while non-smuggling conditions have an unambiguous loss or decrease in welfare. The cost of smuggling to the business agents or traders reflects on the mixture of penalties and real resource costs. There is independent existence in the price and production levels while there is the definition of the welfare levels by Us and Up
Tax Revenue Maximization and Smuggling
First, there is an assumption that the tax or custom authority obtains the exportation tax rate (t) from the central government. The main objective of the customs authority is to maximize the levels of trade tax revenues. The crucial tool or instrument that the custom authority can apply in dealing with this objective is the degree of enforcement. Assume that the enforcement is costless and the authority has the capacity to eliminate smuggling altogether thus obtaining g (l, s)=0. With reference to the assumptions, it is possible for the authority to maximize tax revenue at a positive level of smuggling. Illustration in figure 1 indicates that with the taxation system in the process of transaction (non-smuggling condition), production levels reflect at P1 with legal trade at C1tP1t. This compares to the smuggling condition or situation where production is at Ps with legal trade at Q1mQ1s. The customs authority can decide to maximize the tax revenue levels at g because of the fixed rate by the central government. Illustrations indicate that an increase in the total or overall transactions because of high prices is greater that quantities within the smuggling situation or condition
Smuggling and Price Disparity
In most of the commodity models of smuggling, the domestic relative price of the exportable terms of any importable is bounded by the free trade relative prices and taxation inclusive free trade relative prices. The other scenario is where prices are considered in monetary units, the domestic price of an exportable subject to an export tax might be more than its free trade price. This is because of the fact that smuggled exportable has the capacity to earn foreign exchange, which might prove to be of enormous value in the illegal or black market situation. In the absence of trade interventions in the direction of a particular exportable, the domestic price might still be more than the legal trade price in the presence of intervention in relation to the market for other commodities or flow of capital that might cause the existence of black or illegal market. Price disparity of any product or commodity that has price value in terms of money can be calculated by comparing the domestic price of the commodity with the quantity of the domestic exchange earned in the process of free trade. Domestic exchange refers to the world price times the legal, effective exchange rate for the exportable. Price disparity can be expresses as the percentage of free or legal trade price
Application of the Model to the Policy Question
Since the model proves that lighter fines or penalties prove to enhance the development of smuggling within the economy, it is appropriate for the government to tightening the rules and regulations in relation to business transactions. This would discourage smugglers to jump from the illegal business practice since they would have to forego their prices in paying the cost of smuggling. The penalties should be heavy to the extent that it exceeds the profit levels for the smugglers. This would reduce their welfare as they participate within the black market. The authority should also reduce the cost of tariffs and taxation system in order to maximize its revenue and profit levels. This is because the model illustrates that high tariffs and taxation systems enhances the development of smuggling activities within the economy. In order to avoid neglecting taxes by the smugglers, it is crucial for the government to consider the opportunity of bring down the taxes. This would increase the level of revenues of the authority since the smugglers would see no reason to evade the taxation system. Their contribution would enhance the maximization of welfare of the community. It is crucial for the market system to facilitate itself without external influence. Smuggling represents external influence within the development of the market structure. The government should also reduce the level of corruption within its systems. This would reduce the level of smuggling of commodities since the smugglers would find it difficult to go against or behind the business principles and policies. Human smuggling should be promoted within the setting of the nation in case it has positive effects in relation to maximization of the welfare. Most of the human smuggling cases seek to eradicate their poor state thus working towards development of the society or the entire planet.
How Conclusion Matches or Contradicts other Theories or Economic Models
The main objective of this model is to present and illustrate the coexistence of smuggling, price disparity, and legal or free trade. This is defined as the domestic price that is more or less than the return from legal exports and imports. There is a difference between this model and the model presented by Bhagwati and Hansen in attempts to determine the cost of smuggling. This is because, the presence of legal trade is applied in this model to cloak smuggling activities with the implication that the greater the volume of free (non-smuggling situation); the less the cost of smuggling in an economy. The model concludes that smuggling might be welfare increasing in different scenarios thus it is considered to have an unambiguous impact. Non-smuggling condition also has the capacity to lower down the welfare of the economy thus unpredictable economic scenario. The model explains that, in cases where the costs of smuggling involve fines and confiscation, there is the difference in tariffs and the values of the fines. In this scenario, smuggling has the capacity to increase unambiguously the level…