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Trade as Engine of Political Change: A Parable

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  • Alessandra Casella.

Abstract

If efficient economic activity requires appropriate public goods, then changes in the volume and flow of trade will induce changes in the demand for these public goods. In general, if people disagree over their preferred levels of public goods, the expansion of trade may affect the structure of jurisdictions responsible for their provision. This paper presents a simple example meant to illustrate the general principle. It studies a general equilibrium model where the size of the market is easily parametrized and welfare depends on private exchange and two public goods. Preferences over one of them are heterogenous, but administrative costs initially make the formation of two separate jurisdictions too expensive. However, as the market expands, reliance on the public goods increases and with it the importance of having access to the correct public good. A federal system becomes optimal when the market is sufficiently large.
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Suggested Citation

  • Alessandra Casella., 1993. "Trade as Engine of Political Change: A Parable," Center for International and Development Economics Research (CIDER) Working Papers C93-012, University of California at Berkeley.
  • Handle: RePEc:ucb:calbcd:c93-012
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    References listed on IDEAS

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    1. Tamim Bayoumi and Barry Eichengreen., 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse- Response Analysis," Economics Working Papers 92-201, University of California at Berkeley.
    2. Alessandra Casella., 1992. "Arbitration in International Trade," Center for International and Development Economics Research (CIDER) Working Papers C92-003, University of California at Berkeley.
    3. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    4. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters,in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc.
    5. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Macroeconomic Adjustment under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Economic Journal, Royal Economic Society, vol. 104(425), pages 813-827, July.
    6. Alessandra Casella & Jonathan S. Feinstein, 1990. "Public Goods in Trade: On the Formation of Markets and Political Jurisdictions," NBER Working Papers 3554, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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