On the economic theory of smuggling

Abstract

Earlier models of smuggling are deficient in their treatment of risk and transport costs. A model of smuggling of agricultural goods in an intra-EEC context is constructed, with due regard to such costs. Smuggling of agricultural goods is an increasing cost industry, not because of unspecified or unplausible externalities, as in earlier papers, but because of increasing transport costs as the extensive margin of source-locations for smuggled goods is expanded. In consequence, intra-marginal smugglers can earn economic rents. The theoretical model is supported by empirical studies of trade between the Republic of Ireland and Northern Ireland.