Inefficient and Locally Stable Trade Equilibria under Scale Economies: Comparative Advantage Revisited

William Baumol () and Ralph E Gomory

Kyklos, 1996, vol. 49, issue 4, 509-40

Abstract: In the presence of scale economies a country, that is the exclusive producer of a commodity can retain its monopoly against efforts of others to enter on a small scale even if that firm has neither absolute nor comparative advantage in its production. Equilibria can violate comparative advantage, be inefficient, and yet be stable. Equilibria that violate comparative advantage can be efficient. Sufficient efficiency conditions for the scale economies case are provided, and local efficiency and (quantitative) degree of inefficiency are explained. The analysis confirms that, in a world of scale economies, market forces cannot be relied upon always to yield an efficient equilibria. Copyright 1996 by WWZ and Helbing & Lichtenhahn Verlag AG

Date: 1996
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