The testable implications of competitive equilibrium in economies with externalities

Suppose that one has a data set consisting of prices and individual endowments for some economy. Brown and Matzkin (Econometrica 64:1249–1262, 1996) have shown that there are conditions that the data have to satisfy, if the observed prices are determined by the competitive equilibrium process, given the observed endowments, when there are no external effects in the economy’s interactions. The results here show that the same conclusion does not apply, in general, if the economy exhibits externalities. On the other hand: (i) some restrictions exist if there exist at least two commodities on which the individuals’ preferences are weakly separable; (ii) although extremely mild, restrictions exist too if one observed individual consumption for the economy that causes the external effects; and (iii) importantly, even if the previous two cases do not apply, restrictions exist when the externalities that exist are in the form of a public good.     

Evolution of Walrasian equilibrium in an exchange economy

We study the stochastic stability of a dynamic trading process in an exchange economy. We use a simplified version of a trading model à la Shapley and Shubik (J Polit Econ 85:937–968, 1977). Two types of agents equipped with Leontief preferences trade goods in markets by offering endowments, and actual trades occur at market clearing prices. Better behavior tends to spread through the same type of agents by imitation, and agents also make mistakes occasionally. We provide a sufficient condition for the perturbed dynamic process to have a unique stochastically stable state that is a Walrasian equilibrium allocation. In this sense, we give a rationale for Walrasian behavior.     

An equilibrium voting model of federal standards with externalities

This paper proposes a framework for studying policy making in a federal system in the presence of spillover externalities. Local jurisdictions choose local policies by majority rule subject to standards that are set by majority rule at the federal level. We characterize the induced preferences of voters for federal policies, prove existence of local majority rule equilibrium, provide an example of non-existence of global majority rule equilibrium, and explore the welfare properties of federal standards in the presence of spillovers.     

Benefits and unemployment in an open economy: an equilibrium analysis

This paper examines the relation between uemployment compensation and unemployment in The Netherlands. This relation is studied by menas of a small macroeconomic model for an open economy that assumes equilibrium in the labour market and on the current account. The model yields an elasticity of unemployment to benefits of 1.0, which is high compared to microeconomic research and the outcomes of disequilibrium models for The Netherlands. According to the model, a rise in the ‘wedge’ (i.e. the difference betweenn real labour cost and real net wages) leads to an increase in unemployment, whilst shifting this wedge from the employers to the employees induces a fall in unemployment.     

Optimality of the competitive equilibrium in the Uzawa-Lucas model with sector-specific externalities

Summary. In this paper, we show that the competitive equilibrium is optimal in the Uzawa-Lucas model with sector-specific externalities associated to human capital in the goods sector. Thus, these external effects do not provoke a market failure and do not provide a rationale for government intervention.Received: 1 November 2002, Revised: 3 June 2003, JEL Classification Numbers: E62, H21, O41.I wish to thank Sandra López Calvo and an anonymous referee for their valuable comments. Financial support from the Spanish Ministry of Science and Technology and FEDER through Plan Nacional de Investigación Científica, Desarrollo e Innovación Tecnológica (I+D+I) Grant SEC2002-03663 is gratefully acknowledged.     

Intertemporal complementarity and money in an economy out of equilibrium

The role of money clearly stands up in a truly irreversible process of economic change, like the building up of an altogether new productive capacity. Money has an essential role in this process, although not in the usual sense of modifying the real equilibria of the economy. As a matter of fact the problem to be faced in the context considered-where focus is on the process of change in itself rather than on its outcome-is theviability of the process of change. This paper shows that it is indeed the availability of financial resources at the right moment during the process that determines its viability, and that this stresses the fact that, out of equilibrium,real choices cannot be separated from financial decisions.     

An endogenous equilibrium game on traffic congestion externalities

Traffic congestion and road tolls are familiar economic concepts for most undergraduates; however, students often have difficulty explaining exactly how theoretical principles like externalities and social welfare are related to their real-world experiences, such as driving. The authors present a classroom exercise to demonstrate how congestion externalities are generated, the effects on private and social welfare, and how appropriately priced tolls can address congestion externalities. Students are asked to evaluate outcomes in five different driving scenarios, with and without congestion or tolls. The authors offer discussion questions to make the activity engaging and informative. They report the results of their efforts to administer the exercise. This 75-minute exercise is appropriate for introductory or intermediate microeconomics, political economy, or environmental economics classes of various sizes.     

Existence of a statistical equilibrium for an economy with endogenous offer sets

A statistical equilibrium consists of distributions over offer sets of agents that can be achieved in the greatest number of ways. Although it is known that a unique equilibrium exists when the offer sets are finite and exogenous, the general case has been an open question. This paper (1) generalizes the concept of statistical equilibrium to the case where offer sets are endogenous and not necessarily finite, (2) proves the existence of equilibrium, (3) discusses a computational algorithm to obtain the equilibrium, and (4) applies the theory to the labor market and analyzes the implication of the minimum wage policy.     

Union objectives and indexation externalities in a monopolistically competitive economy

This paper extends the literature on indexation externalities by analyzing equilibrium and efficient indexation in a unionized economy characterized by a monopolistically competitive goods market. The assumption that union objectives relate to both employment and the real wage implies that union indexation decisions are associated with a negative externality and, as a consequence, the equilibrium degree of indexation is inefficiently high. This feature is characteristic of both passive and activist policy environments.     

Rationing in an open economy: Fix-price equilibrium and two-gap models

Two-gap models have been criticized severely for the lack of realism of their assumptions but are still prominent in development planning and, implicitly, in discussions of short-run policy problems. Here the model's applicability outside a command economy is considered by comparing it with a rationing model with proper micro-foundations. It is shown that the two-gap model in general violates fix-price equilibrium properties but that the fix-price model generates quite similar results.     

The share economy in general equilibrium

Weitzman's 1982 paper on increasing returns and unemployment equilibrium is driven by the presence of a Clower constraint and does not provide a persuasive model of unemployment. The employment effects of implementation of a share economy are impossible to evaluate until unemployment equilibrium is understood. Further, the determination and adjustment of the share parameter and of labor demand are unsatisfactory in Weitzman's model.     

Existence,uniqueness, and stability of equilibrium in an OLG economy

Summary. This paper presents sufficient conditions for the existence of a unique and globally stable steady state equilibrium for OLG economies with production. The conditions impose separate requirements on the utility and production functions. Moreover, the conditions do not require assumptions concerning the third order derivatives of the production and utility functions.Received: 12 August 2002, Revised: 7 January 2003, JEL Classification Numbers: D50, D91, E13, O41.I would like to thank Nick Baigent, Laurie Conway, Karl Farmer, Christian Gehrke, and Hideo Konishi for helpful comments. I am grateful to an anonymous referee for his or her comments.     

Utility and production externalities, equilibrium efficiency and leisure specification

This paper analyzes the implications that the specification of the leisure activity has on the equilibrium efficiency in a two-sector endogenous growth model with human capital accumulation. We consider external effects of consumption and leisure in utility, and sector-specific externalities associated to physical and human capital in production. The optimal tax policy to correct for the distortions caused by the externalities is characterized under all the typical leisure specifications considered in the literature: home production, quality time and raw time. We show that the optimal policy depends markedly on the leisure specification.     

Decentralization with externalities

In this paper, we examine in a systematic way the problem of decentralization in an economy with all types of externalities. We show that decentralization with artificial markets requires strong convexity assumptions which are typically not fulfilled for negative externalities on producers. A milder form of decentralization with taxation is shown to obtain under weaker convexity assumptions. A new example is given to explain the role of a non-interiority assumption. Finally, new types of non-convexities are described and the problem of rights to externalities is clearly defined in the framework of this general theory.     

Efficiency and nonlinear pricing in nonconvex environments with externalities: A generalization of the Lindahl equilibrium concept

It is a well-known fact that if damaging externalities occur, nonconvexities will necessarily arise in the underlying economic environment rendering questionable the relevance of standard market approaches to the allocation problem. In response to this state of affairs, we define and study a generalization of the Lindahl Equilibrium concept that allows for nonlinear pricing systems in which the marginal outlay may depend on the quantity purchased. This “Generalized Lindahl Equilibrium” attains local pareto efficiency for its associated allocations and is able to support (in the usual sense) any pareto efficient allocation that satisfies a regularity condition.