Inefficient and locally stable trade equilibria under scale economies: Comparative advantage revisited

In the presence of scale economies a country that happens to be the exclusive producer of a commodity will be able to retain its monopoly against efforts of others to enter on a small scale even if that firm has neither absolute nor comparative advantage in its production. Hence equilibria can violate comparative advantage, be inefficient and yet be stable. Moreover, equilibria that violate comparative advantage can be efficient. In the article, sufficient efficiency conditions for the scale economies case are provided, and, two new concepts, local efficiency and (quantitative) degree of inefficiency are explained. The analysis confirms that in a world of scale economies marker forces cannot be relied upon always to yield an efficient equilibrium.