If economies are all imperfectly competitive because all economic activities are subject to increasing returns to scale, is free trade still optimal? Explain

Increasing return to scale refer to a situation where production output increases more than increased production input. Free trade refers to a market that is controlled entirely by the private sector and has little government intervention. In this type of market, the forces of demand and supply are the main factors that determine the price of goods and services.

Yes, free trade would still be optimal in an imperfect competition that is caused by increasing return to scale. This is because external factors of production do not cause imperfect competition, but it is due to the internal factors. Thus, free trade would still be optimal since the imperfect competition results from internal market forces, but not external forces. One of the conditions for free trade is that all factors that impact the market should be internal but not superficial.