The Optimality of Arbitrary Partial Equilibrium Welfare Analysis

Author: DUHAMEL, MARC

Source: Journal of Public Economic Theory, Volume 8, Number 2, May 2006 , pp. 321-343(23)

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Abstract:

This paper characterizes the general equilibrium foundation of arbitrary partial equilibrium welfare analysis in second-best economies. While prior theory recognizes the importance of market distortions affected by relative price changes, it offers little guidance about the necessary scope of Marshallian partial equilibrium analysis. The paper determines necessary and sufficient conditions for optima of Marshallian total surplus functions to characterize second-best Pareto-optimal allocations. While these conditions confirm much of the traditional approach to applied welfare economics, they bring doubt about its reliability for public policy and concerns over its systematic use to build conventional economic wisdom.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-9779.2006.00266.x

Affiliations: 1: Industry Canada and Phelps Centre for the Study of Government and Business

Publication date: 2006-05-01