Social welfare theorem and the wider impact of sanctions: Are the winners and losers of sanctions only those expected?

Abstract

It is well-established that trade restrictions, while not ideal for consumers, can benefit a select few, at the expense of the general public. This chapter expands on this idea and examines the unintended consequences of trade restrictions in the form of sanctions on major energy-producing countries. This paper demonstrates that the Social Welfare Function in the sender(s) and third countries decreases if even one free-rider is present. Secondly, the analysis indicates that a slight increase in marginal costs has a larger impact on reducing consumer surplus, compared with a decrease in the number of firms by one. Thirdly, at the firm level, it shows that a greater loss results from an increase in marginal costs (i.e. removal of a primary producer) than from any increase in profits coming from the reduction in the number of competitors. Lastly, it shows that the withdrawal of international firms benefits some non-frontier firms in the target country, both through reduced competition and through the expropriation of foreign resources.