Kemp and Wan (1976) proved a theorem on the formation of customs unions: a common tariff vector can be found in the union such that there exists a Pareto improvement in the union without changing the international prices and the purchases from the rest of the world in the associated tariff-ridden competitive equilibrium. However, this Pareto-optimum may imply a tariff-ridden competitive equilibrium with an intra-union income transfer that does not seem to be very realistic.
We give a strictly analytical proof to show that under some conditions on the tariff vector, the equilibrium can be established without intra-union income transfer and the utility of every country in the customs union can be improved when the customs union consists of three countries.
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Ling, Q., Koji, S. (2009). A Pareto Improvement in Customs Unions Without Intra-Union Transfer. In: Kamihigashi, T., Zhao, L. (eds) International Trade and Economic Dynamics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-78676-4_9
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DOI: https://doi.org/10.1007/978-3-540-78676-4_9
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