The gains from trade and refusal to trade

Purpose - Instances of refusal to trade stand in contrast to the theorems on the gains from trade. Two paradigms, second-best and political economy, have been used to explain refusal to trade. Murray Kemp (1962) provided a foundation for the political economy paradigm when he noted that, in the absence of lump-sum redistribution, the theorems on the gains from trade are ''true but irrelevant''. This chapter takes Murray Kemp's observation as a point of departure for a consideration of the relation between individual and group gains from trade. Paradigms in explaining refusal to trade are distinguished. Methodology/Approach - This chapter examines ideas underlying explanations for refusal to participate in international trade. Findings - Two different approaches are identified in modeling and explaining why the gains from trade are compromised by refusal of governments to allow free trade. The second-best approach suggests a justification for refusal to trade while the political economy approach with public-choice foundations proposes an explanation. Practical implications - Ideology expressed in how governments are viewed can influence economic analysis.