TRADE ADJUSTMENT ASSISTANCE AND PARETO GAINS FROM TRADE

In a model where all factors of production are imperfectly mobile, we argue that the Dixit-Norman scheme of commodity taxes may not lead to strict Pareto gains from trade. Rather, this scheme must be augmented by policies that give factors an incentive to move between industries: hence, the role for trade adjustment assistance. By offering an adjustment subsidy to all individuals willing to move, and also using the Dixit-Norman pattern of commodity taxes, the government can implement Pareto gains from trade under the condition we identify,