Stable Disequilibrium Prices: Macroeconomics and Increasing Returns I

The paper establishes conditions for the existence of a set of prices which are stable and at which markets do not clear, providing a rigorous foundation for the existence of fixed-price equilibria via the macroeconomics of increasing returns. It analyzes a Walrasian price adjustment process for a general equilibrium economy with economies of scale in production

Robustly Efficient Equilibria in Non-Convex Economies

An economy has a robustly efficient marginal cost pricing equilibrium (mcpe) if it has an mcpe that is Pareto efficient and if this property is preserved under small variations in preferences endowments and technologies. We consider economies in which there is a finite number of equilibria, each of which varies continuously with preferences and endowments. We prove that there exist no robustly efficient marginal cost pricing equilibria

Arbitrage and Equilibrium in Economies with Infinitely Many Securities and Commodities

Welfare economics and finance have each evolved their own equilibrium concepts. In welfare economics this is the concept of a competitive general equilibrium: in finance, it is the absence of arbitrage opportunities. These concepts emerged independently and were initially seen as quite distinct. Each plays an absolutely central role in its field, both in the theory and in practical applications. In the 1980s researchers in both fields began to investigate the connections between the two concepts

Financial Markets for Unknown Risks

An economy faces an unknown individual risk, such as the health effects of recently discovered environmental hazard. Opinions may be widely different about the distribution of risks across the population. We study financial markets that suffice to reach efficient allocations in this situation. The problem is formalized in a general equilibrium economy with incomplete markets for individual and collective uncertainty. We show that ignorance of the probabilities describing individual risk leads to collective risk. Introducing an array of mutual insurance policies and of Arrow securities is shown to lead to Arrow-Debreu competitive allocations. By combining insurance contracts for individual risks and securities markets for collective risks, the proposed institutional framework economizes significantly on the number of markets required for efficiency. The computational complexity of a market equilibrium is reduced from an NP-complete (i.e. intractable) problem to one which depends polynomially on the number of households

Robustly Efficient Equilibria in Non-Convex Economies

An economy has a robustly efficient marginal cost pricing equilibrium (mcpe) if it has an mcpe that is Pareto efficient and if this property is preserved under small variations in preferences endowments and technologies. We consider economies in which there is a finite number of equilibria, each of which varies continuously with preferences and endowments. We prove that there exist no robustly efficient marginal cost pricing equilibria

Global Environmental Risks

We study the risks associated with the prospect of global climate change, and review the mechanisms available for their efficient allocation in market economies. Risks in this field are typically unknown and often unknowable ex ante; their probabilities are endogenous and determined by economic actions; they have both collective and individual components, and they are about processes that may be irreversible. The theory of how to allocate such risks is still being developed, but a certain amount is known about insurance with unknown risks and about uncertainty and irreversibility. We indicate what is known and set out its policy implications, and provide a challenging but realistic research agenda. We show that existing theories provide a framework for evaluating policies for mitigating global climate change. How much a society should pay to mitigate global change depends on a society's discount rate, degree of risk aversion, and assessment of the relevant probabilities. As these may differ from society to society, what societies are willing to pay will vary. These differences may provide a basis for international trade in global climate risks. We argue that there is a real value to international institutional arrangements and financial markets that encourage countries to back words by deeds by making them liable to buy and sell risks associated with global climate change at the prices that their economic policies implicitly put on these risks

Financial Markets for Unknown Risks

An economy faces an unknown individual risk, such as the health effects of a recently discovered environmental hazard. Opinions may be widely different about the distribution of risks across the population. We study financial markets that suffice to reach efficient allocations in this situation. The problem is formalized in a general equilibrium economy with incomplete markets for individual and collective uncertainty. We show that ignorance of the probabilities describing individual risk leads to collective risk. Introducing an array of mutual insurance policies and of Arrow securities is shown to lead to Arrow-Debreu competitive allocations. By combining insurance contracts for individual risks and securities markets for collective risks, the proposed institutional framework economizes significantly on the number of markets required for efficiency. The computational complexity of a market equilibrium is reduced from an NP - complete (i.e. intractable) problem to one which depends polynomially on the number of households

Who should abate carbon emission?

We review the optimal pattern of carbon emission abatements across countries in a simple multi-country world. We model explicitly (with the model in Chichilnisky [4]) the fact that the atmosphere is a public good. Within this framework we establish conditions for it to be necessary for optimality that the marginal cost of abatement be the same in all countries. These condition are quite restrictive, and amount to either ignoring distributional issues between countries or operating within a framework within which lump-sum transfers can be made between countries. These results have implications for the use of tradeable emission permits, which as normally advocated will lead to the equalization of marginal abatement costs across countries. The observation that the atmosphere is a public good implies that we may need to look at a Lindahl equilibrium in tradeable permits

Monetary Policies with Increasing Returns

The paper studies a two-sector monetary economy with two factors of production, labor and capital. The industrial sector has increasing returns to scale, the consumption sector non-increasing returns. All firms maximize profits and markets clear. For each rate of return on capital the model reaches a general equilibrium with an associated demand for money. A monetary policy is a quantity of money supplied. We prove that restrictive monetary policies decrease the level of operation and profits of the increasing returns to scale sector and eventually force it to operate with negative profits, so that it must close down. The other sector of the economy, however, expands with more restrictive monetary policies, but national income as a whole decreases. Monetary policies affect the rate of interest of the economy and determine whether or not competitive market equilibria exist with a positive output in the increasing returns sector. With very restrictive monetary policies, the only market equilibria with continued output from the increasing returns sector are those where this sector is being subsidized. There are, therefore, two choices open to this economy: either adequate liquidity is provided to allow the increasing returns sector to behave competitively and produce positive output, or else this sector must be regulated and subsidized to prevent it from closing down