ECO 3111 Lecture Notes - Lecture 9: Economic Union, Customs Union, Trade Diversion

• School: University of Ottawa
• Department: Economics
• Course: ECO 3111
• Professor: Yazid Dissou

Document Summary

First case for free trade producers and consumers allocate resources most efficiently when government foes not distort market prices through trade policy. National welfare of a small country is highest with free trade. Restricted trade, consumers pay higher prices and consume too little: firms produce too much. Trade restrictions (tariffs) lead to production and consumption distortions. Gains from trade are somewhat smaller for advanced economies, and larger for developing countries. Free trade allows firms to take advantage of economies of scale. Protected markets limit gains from external economies of scale by inhibiting concentration of industries. Free trade provides competition and opportunities for innovation dynamic benefits. Free trade avoids the loss of resources through rent seeking. Spend time and other resources seeking quota rights and the profit that they will earn. Political argument for free trade says that free trade is the best feasible political policy, even though there may be better policies in principle.