| Abstract | In the absence of any policy intervention, the market imperfection can also result in distortion. Based on the demand structure of Behrens type, this paper studies the effect of trade liberalization on market distortions under the framework of firm heterogeneity. With comparative static analysis, it was found that trade liberalization (market expansion or declining trade costs) did not slow down the market distortions, as trade liberalization led to a similar market equilibrium and social optimal consumer welfare. In addition, with the increasing of a economy’s average productivity, there will be a rise in consumer welfare and market distortions deterioration coexist, because the market equilibrium and social optimal consumer welfare are both rising, but the latter rise a greater range, resulting in widening the gap between the two. Therefore, the simple trade liberalization policy can lead to the rise of consumer welfare, but can not play to reduce the degree of market distortions and thereby the misallocation of resource. The policy implication is that industrial policy and trade policy should be used together; with the increasing of a economy’s average productivity, the importance of industrial policy is strengthened. Further research found that the Chinese consumer demand structure to meet the Behrens type. Therefore, the general conclusions obtained in this paper apply equally to China. |