On the Welfare Effects of a Customs Union Versus Unilateral Trade Policies Under Internal Scale Economies and Product Homogeneity

On the Welfare Effects of a Customs Union Versus Unilateral Trade Policies Under Internal Scale Economies and Product Homogeneity

Notwithstanding some recent attempts at analyzing the impact of increasing internal returns to scale (IIRS) on CU theory, research on this issue is still at a highly rudimentary stage. The potentially important implications for CU theory of the introduction IIRS were in fact independently discussed in seminal, albeit relatively neglected papers by Max Corden [1972] and Donald Mead [1968]. This paper selectively surveys and applies the earlier papers to systematically establish conditions under which a CU could, from a single country`s perspective, potentially pareto dominate unilateral trade policies. Relaxation of some restrictive assumptions maintained by Corden [1972] and Mead [1968] allow for the consideration of a wide-ranging and rich milieu of theoretical possibilities of non-negligible practical significance. (JEL Classification: F02, F12, F15)