Preference Externalities and Consumer Opposition to Free Trade

Abstract

This paper aims to explain why some consumers may rationally object to free trade. I describe a differentiated-goods economy in which agents differ in their preferences across categories of goods. Due to increasing returns in production the number of goods produced in a given category depends on the number of consumers who prefer that category. This means that each agent's welfare depends on the number of fellow consumers who share her tastes. Opening an economy to trade changes the distribution of consumer tastes, and can therefore make an individual worse off by shifting production toward her less-preferred varieties. Though some consumers may be harmed, the net impact of trade on social welfare is always positive. Subsidizing producers of one category of good can guarantee that trade is pareto-improving.

Keywords: Trade, preference externalities, political economy of trade policy

JEL Classification: F1, F12, F13