A customs union results in the abolition of tariffs among the member nations while at the same time having a common tariff against the rest of the world. The formation of a customs union involves certain problems. Unless a satisfactory and agreed mechanism is evolved to overcome these problems, it cannot work in an efficient manner. The main problems faced [...]
Before J. Viner developed the theory of customs union, there was a general belief that customs union raises the level of welfare as customs union is a movement towards freer trade at least within a specific area. Viner pointed out that the conclusion concerning increase in welfare due to customs union is not necessarily true. He analysed the production effects [...]
Whether a customs union will increase or reduce net welfare is conditioned by the following factors: Effect # 1. Varying Elasticities of Demand and Supply Curves and Equal Price Differences: If the differences between pre-union free trade price (P2), the pre- union tariff-ridden price (P4) and post-union member country's price (P3) are exactly equal (P2P3 = P3P4) but the elasticities [...]