Maximizing Welfare in Customs Unions: The Case of Agricultural Price Policy Within the EEC

Abstract

A basic idea of economic integration is to increase welfare. Customs union theory, consequently, has concentrated upon welfare effects of such integrated economies (Krauss, Collier). Empirical studies have tried to measure potential gains (Balassa). However, there is another problem to be considered. Once a customs union is formed, policy analysis becomes more complex than with single countries. Various interests of autonomous countries and the particular conditions of supranational integration must be taken into account in selecting policies which maximize welfare within a customs union. The welfare maximization problem in customs unions is particularly relevant for agricultural price policy within the European Economic Community (EEC). This policy must accommodate a complicated system of integrated markets and common financial responsibilities. Moreover, an essential part of this policy involves common decisions on prices for most agricultural products within the EEC. Differing national interests of EEC countries make it difficult to determine which agricultural price policy will be optimal from a welfare point of view. Divergencies among EEC countries since the introduction of monetary compensatory amounts (MCA) have resulted in failure to establish common EEC agricultural prices. The purpose of this paper is to analyze formally the meaning of a welfare-maximizing agricultural price policy within the EEC. The procedure is to formulate explicit welfare functions for EEC agricultural markets and to maximize them with respect to relevant price variables. With integrated economies, we must distinguish between national welfare functions for EEC countries and a supranational welfare function for the EEC as a whole. Then the relevant optimum conditions will reveal an optimal agricultural price policy.' Welfare Functions