Trade as an Engine of Political Change. A Parable

Alessandra Casella

No 779, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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, a parable, designed 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 the second of these public goods are heterogeneous, but administrative costs initially make the formation of two separate jurisdictions too expensive. As the market expands, however, 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.

Keywords: Economic Integration; Federalism; Jurisdictions (search for similar items in EconPapers)
JEL-codes: F15 H11 (search for similar items in EconPapers)
Date: 1993-04
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Working Paper: Trade as Engine of Political Change: A Parable (1993)
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