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Testable Restrictions of General Equilibrium Theory in Exchange Economies with Externalities

Author

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  • Andrés Carvajal
Abstract
The theory of general equilibrium was criticized for its apparent lack of testable implications,as seemingly implied by the results of Sonnenschein, Mantel and Debreu in the Seventies. This view was challenged by the results of Brown and Matzkin (1996) which showed the existence of testable restrictions on the equilibrium manifold of exchange economies. This paper studies a problem similar to the one posed by Brown and Matzkin, for the case of general equilibrium in the presence of externalities. The natural definition of equilibrium in such case is the Nash-Walras equilibrium concept. I first consider the case of strategic externalities, where I assume that each player chooses a consumption bundle, subject to some budget,and a strategy from a continuous domain, and where the utility of each individual depends on his consumption and on the strategies chosen by all the players. I also consider the case of consumption externalities, in which each individual's utility depends on his consumption of all commodities and on the consumption of some particular commodity by all individuals. The results obtained here are rather negative in that they point towards the unfalsiability of the equilibrium hypothesis. Under the assumption that one can observe individual choices for the externality, I find that there exist some extremely mild testable restrictions. This, however, is not a pure extension of the Brown-Matzkin result, since some individual decisions are assumed to be observed. If there is no information on individual choices, I find that the equilibrium concept imposes no testable restrictions. This occurs unless one imposes further assumptions, such as weak separability.

Suggested Citation

  • Andrés Carvajal, 2003. "Testable Restrictions of General Equilibrium Theory in Exchange Economies with Externalities," Borradores de Economia 231, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:231
    DOI: 10.32468/be.231
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    References listed on IDEAS

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    1. Andrés Carvajal, 2003. "A Continuous Extension that Preserves Concavity, Monotonicity and Lipschitz Continuity," Borradores de Economia 230, Banco de la Republica de Colombia.
    2. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(1), pages 99-110.
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    8. Chiappori, P. -A. & Ekeland, I. & Kubler, F. & Polemarchakis, H. M., 2004. "Testable implications of general equilibrium theory: a differentiable approach," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 105-119, February.
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    19. repec:dau:papers:123456789/6427 is not listed on IDEAS
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    Cited by:

    1. Geanakoplos, John & Polemarchakis, H.M., 2008. "Pareto improving taxes," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 682-696, July.
    2. Jean-Marc Bonnisseau & Elena Mercato, 2010. "Externalities, consumption constraints and regular economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 123-147, July.
    3. Carvajal, Andres, 2004. "Testable restrictions on the equilibrium manifold under random preferences," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 121-143, February.
    4. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, August.
    5. Paul Oslington, 2012. "General Equilibrium: Theory and Evidence," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 446-448, September.

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    More about this item

    Keywords

    Nash-Walras equilibrium; externalities; revealed preferences; testable restrictions.;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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