On the Efficiency of a Competitive Equilibrium in Infinite Horizon Monetary Economies.

Okuno, Masahiro; Zilcha, Itzhak

The purpose of this paper is twofold. In the first half of the paper, we shall extend the well-known fundamental theorem of welfare economics. We shall show that any Pareto efficient allocation can be achieved as a compensated equilibrium by a suitable choice of lump-sum (taxes and) transfers (either in the form of commodity transfers or in the form of paper asset transfers). This result, however, is fundamentally different from the well-known result in the finite horizon case. If the horizon is finite, the lump-sum transfers, even in the form of paper assets, must cancel out in aggregate. In other words, the government budget must balance. However, in the consumption-loan type models, the budget need not balance even asymptotically. This is exactly the reason why, in some cases, one needs to introduce a paper asset to achieve a Pareto efficient equilibrium. The introduction of a paper asset, or outside money, is required when the government budget is asymptotically negative. In the other case when the government budget is asymptotically positive, a paper obligation or outside debt, such as an obligation to pay taxes to the government, must be introduced. In the second half, we will be concerned with identifying unacceptable transfers. Namely, we will inquire what class of transfers can never achieve a Pareto efficient equilibrium given certain information about the underlying economy. For this purpose, it is important to identify whether or not a given (competitive) equilibrium is Pareto efficient. In Theorems 2 and 3, we given this identification criterion using the Cass (1972)Benveniste (1976) characterization of efficiency prices. In Theorem 4, we show that, in a certain fairly reasonable economy, the government deficit cannot grow too fast if we are to achieve a Pareto efficient equilibrium.

COMPETITION; ECONOMICS; ECONOMIC equilibrium; EQUILIBRIUM; MONETARY policy; PRICES; ECONOMIC policy; SOCIAL sciences

Review of Economic Studies, 1980, Vol 47, Issue 4, p797

0034-6527

Academic Journal

10.2307/2296945