Abstract
A general equilibrium model is used to demonstrate that, in the presence of domestic subsidies, trade can be welfare reducing relative to autarky. McDonald's comment claims that trade is always welfare improving with domestic production subsidies. He states that, when deriving a no-gains-from-trade point with production subsidies, Schmitz, Sigurdson, and Doering (SSD) (1986, 1988) and Anania and Bohman (AB) mistakenly confuse the overall welfare effects of a production subsidy with the welfare effects of free trade. First, we show that AB made the correct welfare comparison using a partial equilibrium model and then extend the results using a general equilibrium model.
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