World welfare under a customs union
A) increases because of a trade creation effect.
B) increases because of a trade diversion effect.
C) is not affected by the trade creation and the trade diversion effects.
D) decreases because of a trade creation effect.

Question

Quizplus · Accepted Answer

The formation of a customs union between Greece, Germany, and France would eliminate the tariffs and barriers to trade between them. Since Germany is the low-cost producer of calculators, Greece would import more from Germany, resulting in a trade creation effect. This would lead to lower prices for consumers in Greece and an increase in consumer surplus. As a result, the welfare of the world would increase due to increased efficiency and the elimination of barriers to trade.

World Welfare Under a Customs Union