Home > International Trade, Microeconomics, Tax Policy > When Doesn’t Trade Make Everyone Better Off?

When Doesn’t Trade Make Everyone Better Off?

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There’s lots of good thought in this article by Megan McArdle. But this especially caught my eye, as we head into a class on the benefits of trade:

Nor do transfers seem ideal — necessary, maybe, yet also curiously inadequate. A disability check is a poor substitute for a job, from both the recipient and the taxpayer’s perspective. The sort of person who prefers a disability check to a decent job is the only person we don’t want to help.

It’s fairly easy to demonstrate that when two countries trade, both are better off, in total.

We know that within countries, there will be winners and losers, and that the gains of the winners are bigger than the losses of the losers, so that, in theory at least, the winners could compensate the losers–could literally give them cash!–and still everyone would be better off.

McArdle is pointing out one of many practical problems with this idea: many of the losers may receive lower utility from compensation. In that case, you could have a society where winners and “losers,” after compensation, are both better off, and yet in terms of utility, society is worse off.

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