This paper constructs a simplified framework for analyzing the welfare effects of free trade areas. We provide an alternative proof of the Panagariya-Krishna proposition on free trade areas, shortening the proof, covering a broader set of circumstances, and showing that the necessary income flows to guarantee welfare gains to all members are paid out of each country's own tariff revenues. The paper provides a close parallel to the important Kemp and Wan custom union theory.
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Paper provided by University of Illinois at Urbana-Champaign, College of Business in its series Working Papers with number
03-0104.