Some Efficiency Effects of Customs Union

Abstract

Granting free access to competitive imports from other EC Member States and garanteeing exports a free and lasting access to a large Community Market have traditionally been thought to induce significant improvements in the economic efficiency of European industry. In studying the validity of this proposition in greater detail, one needs to separate scale effects (in chapter 2) from those efficiency effects, that arise given non-decreasing cost schedules (below). A further distinction between price efficiency and technical efficiency is also useful. In the static framework of the standard neoclassical theory of production price efficiency refers to optimal allocation, given factor prices and given technical efficiency. Price efficiency prevails if, for every input employed, its marginal product is the same for all alternative employments technically feasible. Technical efficiency, on the other hand, refers to input minimization of any given output level, given the employment of the best techniques available. In a world of truly perfect competition, technical inefficiency cannot exist as it would lead to bankruptcy of the firms letting it develop. Thus, in neoclassical customs union theory that is based on perfect competition, technical inefficiency cannot arise without introducing special assumptions.