come of corresponding market participants.1 Under this assumption in the
short-run trade cost reductions always raise welfare in all regions as other-
wise lost resources are saved. But, if trade costs are, at least partly, of a
tariff type, this short-run result may not be valid anymore, since importing
regions may loose additionally tariff- revenues. Especially for less developed
regions who depend much on monopolistic imports this revenue loss could
be strong enough to reduce regional welfare.
Tariffs affect also the long-run equilibrium by means of stabilizing the
symmetric and equal distribution of economic activity. On the one hand
tariffs increase trade costs and generate the well known effect of from the
NEG that trade barriers protect domestic industries and a sustainable core-
periphery equilibrium gets less likely. On the other hand tariffs generate
revenues which are the higher the more the region or country relies on im-
ports of monopolistically commodities. But, relying relatively more on im-
ports implies also that the region is relatively less developed such that tariffs
generate an implicit transfer from the rich to the poor. Therefore, as long
as the symmetric distribution of economic activity is distorted, this implicit
transfers by tariffs force the economy back to the symmetric equilibrium.
Nevertheless it must be emphasized that tariffs reduce aggregated welfare
since resources are prevented to move to the more efficient region. From the
view of a central planer, therefore, a removal of all kinds of trade barriers
would increase aggregated efficiency. Unfortunately, this best solution con-
cerning efficiency cannot be reached automatically, since potential losers face
no incentive for common tariff reductions, in the short-run as well as in the
long-run. One solution to this trade off between equity and efficiency could
be an appropriate compensation of the losing region by the winning region,
for instance by transfers. In this sense, transfers can be seen rather as a
necessary policy to reach efficiency if initially unequal regions join a customs
union than as a policy with the goal of equity.
The remainder of the paper derives theoretically the above presented
1An exception is Ottaviano, Tabuchi and Thisse (2003), who assume that trade costs
absorb ressources.