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 [...]
Jacob Viner's partial equilibrium analysis, based upon trade creation and trade diversion effects, is undoubtedly useful but is only of elementary character. The writers like R.G. Lipsey and J. Vanek have analysed the theory of customs union in the general equilibrium framework. 1. The Lipsey Model of Customs Union: In the partial equilibrium approach, Jacob Viner pointed out that trade [...]