Customs union theory reasons that the formation of a customs union will decrease members' real welfare when the:
A) Trade diversion effect exceeds the trade creation effect
B) Trade production effect exceeds the trade consumption effect
C) Trade consumption effect exceeds the trade production effect
D) Trade creation effect exceeds the trade diversion effect

Question

Quizplus · Accepted Answer

According to customs union theory, a customs union may lead to trade diversion, which occurs when cheaper goods from non-member countries are replaced with more expensive goods from member countries. This results in decreased real welfare for the members, which happens when the trade diversion effect exceeds the trade creation effect of the customs union.

Customs Union Theory Reasons That the Formation of a Customs