In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with Country B. The "net welfare effect" on country A from the formation of this customs Union with country B would be __________.

Question

Quizplus · Accepted Answer

When country A forms a customs union with country B, the tariff between A and B is eliminated, resulting in an increase in trade between these two countries. The elimination of this tariff will cause a reduction in price for A's consumers and an increase in welfare for country A as a whole. However, since the tariff between A and C remains in place, there will be no effect on trade between A and C. 
The net welfare effect on country A would be the sum of areas (a + C) minus areas (b +F). This is because the elimination of the tariff between A and B will create trade diversion from country C to country B, which will result in a loss of welfare for country A equal to area b. At the same time, the increase in trade between A and B will create a gain in welfare for country A equal to area F. Therefore, the net welfare effect on country A would be equal to areas (a + C) minus areas (b +F).

In the Diagram in Question #8 Above, Suppose That Country