International Trade Theory and Policy
by Steven M. Suranovic

Trade 80-5E

The Net Welfare Effects of Free Trade under Monopolistic Competition

The welfare effects under the basic assumptions of the model are entirely positive. Improvements in productive efficiency arises as firms produce further down along their average cost curves in free trade. Consumption efficiency is raised because consumers are able to buy the products at lower prices and have a greater variety to choose from.

Potential costs arise in the model only if we introduce the additional assumptions of adjustment costs or transactions costs. The net welfare effect in the presence of adjustment and transactions costs might still be positive if the production and consumption efficiency effects are larger.

International Trade Theory and Policy - Chapter 80-5E: Last Updated on 2/15/07