This paper examines the welfare effects of the formation of a free-trade area (a set of countries that abolish tariffs among member countries but let individual member countries to set external tariffs). If a representative consumer has love-of-variety preferences, the welfare function exhibits...

Consider an environment in which ex-ante symmetric countries can form customs unions freely. What are the welfare effects on member and nonmember countries of the formation of welfare-maximizing customs unions? What are the properties of stable customs-union structures? Is a symmetric...