Towards a Common Market: Factor Mobility in a Customs Union.

This paper examines whether the member countries of a customs union would gain from moving towards the next stage of economi c integration, the common market. When the set of common external tar iffs is not chosen optimally, increased factor mobility may reduce th e welfare of the customs union. However, common market formation is t he best policy when a customs union of any size sets its tariffs to t he appropriate levels.