Abstract
This paper studies the consequences of a private or depletable externality on free trade agreements in a general equilibrium framework. lt is shown that there always exists a stable system of free trade spaces in the world economy. This stable system can result in either non-cooperation, partial cooperation, or total cooperation among countries of different types. The non-cooperation system is Pareto dominated by any other cooperating system. By enforcing a tax policy, a GATT arbitrator is able to implement Pareto superior stable systems in which countries of different type are cooperating.
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