Social Optimality in International Trade Under Monopolistic Competition

Abstract

We study the homogeneous model of international trade under the monopolistic competition of producers. The utility function assumes additive separable. The transport costs are of “iceberg types”. It is known that, in the situation of market equilibrium, under linear production costs, the social welfare, as a function of transport costs, decreases near free trade while (counter-intuitively!) increases near total autarky. Instead, we study the situation of social optimality. We show that total welfare decreases. We restrict our study by the case of two countries, “big” and “small”. Moreover, we study two important “limited” situations: near free trade and near total autarky. We show that near free trade, the welfare in the small country decreases; as to the big country, we find examples when (1) the welfare decreases and (2) the welfare (counter-intuitively!) increases. Besides, in the autarky case, we describe the situations of decreasing/increasing of welfare in each country.