The missing equation: The wedge model alternative

This article develops an alternative method for solving the problem of the “missing equation” by including the market-nonmarket decision for factors and capital-labor mix decision for producers. The result is a wedge or supply-side model of the economy. This general equilibrium macro model describes the interaction between the product and factor markets, describes both the income and substitution effects of government actions, and provides new insights into the full impact of the government sector.