Limits to the Potential Gains from Economic Integration and Other Supply Side Policies

Abstract

Classical welfare economics demonstrates potential Pareto improvements from `supply side' policy changes that increase the efficiency of aggregate production. Special cases reviewed here concern market integration through customs unions and the gains from international trade. These classical results require incentive incompatible lump-sum transfers. Generally, other policies must compensate deserving losers. Following Dixit and Norman, we consider a freeze of consumer post-tax prices, wages, and dividends, with tax rates and producer prices left to clear markets. Actual Pareto improvements are then generated by uniform poll subsidies. With appropriately distributed external tariff revenue, neither international transfers nor free disposal are required.

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