Gains from trade without lump-sum compensation

  • Dixit A
  • Norman V
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This paper examines the possibility of designing a free-trade equilibrium that is Pareto superior to a given autarkic one, using redistributive tools other than lump-sum transfers. It is shown that (i) if the production frontier allows some non-zero transformation in the neighbourhood of autarky, and (ii) there is a commodity, pure or composite, for which no two consumers trade on opposite sides of the market, then taxes and subsidies on goods and factors suffice for the purpose. If uniform poll subsidies are available, then condition (ii) is not needed. Such policies are compatible with incentive-compatibility constraints, while lump-sum transfers are not. © 1986.

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  • Avinash Dixit

  • Victor Norman

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