The costs and constraints of membership, and the position of candidate countries

Overview

Opportunity cost of a net contribution to a common budget.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Why does joining a customs union mean giving up an independent trade policy?

   Model answer

   A customs union works only if every member applies the same tariff to imports from outside, because otherwise goods would enter through the member with the lowest tariff and then circulate freely. Setting that common external tariff has therefore to be a joint decision, which removes each member's ability to choose its own tariffs, and it also removes the ability to sign an independent trade agreement with a third country, since such an agreement would open a low-tariff route into the whole bloc. A member that would prefer lower tariffs on food or raw materials than the bloc average is stuck with the average.

2. 2

   What is the opportunity cost of a net contribution to a common budget?

   Model answer

   A net contribution is the excess of what a member pays into the common budget over what it receives back in spending on its own territory. The resources handed over could otherwise have financed domestic public services, public investment or tax reductions, so the opportunity cost is the best of those forgone alternatives. Judging whether the contribution is worthwhile requires comparing it with the value of what membership delivers in return, which includes market access and inward investment as well as direct receipts, so a member can be a net budget contributor and still gain economically overall.

3. 3

   Analyse how a common external tariff harms consumers in a member state.

   Model answer

   The tariff raises the price of imports from outside the bloc above their world price, so consumers pay more for those goods and buy fewer of them, losing consumer surplus. Some of that loss is transferred to the common budget as revenue and some to producers inside the bloc as higher prices, but part is a deadweight loss reflecting consumption forgone and resources used by inefficient internal producers. The burden falls hardest where the outside world is the low-cost source, which is often the case for food, clothing and some manufactures, and because spending on these is a larger share of low incomes, the tariff tends to be regressive.

4. 4

   Explain how a system of agricultural price support inside a bloc affects consumers, farmers and producers outside the bloc.

   Model answer

   Price support sets a floor above the market-clearing level, so consumers pay more than the world price and reduce the quantity they buy, losing consumer surplus. Farmers inside the bloc receive a guaranteed higher price and expand output, gaining producer surplus, and the higher price attracts resources into farming that would be more productive elsewhere. Because supply exceeds demand at the supported price, the surplus must be bought up, stored, disposed of or exported with assistance, all of which cost taxpayers. Producers outside the bloc face both an external tariff limiting their access and competition from assisted exports in third markets, so their prices and export earnings are depressed, and many of them are in low-income countries.

5. 5

   Why do harmonised bloc-wide regulations impose a cost on a firm that sells only in its own domestic market?

   Model answer

   Common standards on safety, environmental performance, labelling, data and employment apply to all producers in a member state, not only to those who export. A firm serving only local customers must still meet the requirements, bear the compliance, testing and record-keeping cost, and adapt its processes, yet it gains none of the offsetting benefit of easier access to other members' markets. Because much of that compliance cost is fixed rather than proportional to output, it falls most heavily on small firms, raising their average costs relative to large ones and acting as a barrier to entry.

6. 6

   In economic terms, what does a member state actually give up when it transfers decisions to a common institution?

   Model answer

   What is given up is control over particular policy instruments. A member of a customs union loses the tariff; a member of a single market loses much of its freedom to set product regulation, state aid and competition rules; a member of a currency union additionally loses the interest rate and the exchange rate. The cost of losing an instrument is the loss of the ability to tailor it to national circumstances, and it matters most when the national economy differs from the bloc average, because a common setting will then be persistently wrong for it. The offsetting benefit is that common rules eliminate the trade costs that differing national rules create, and that a shared framework can bind a government to policies it would find hard to sustain alone.

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