Microeconomics Question from Walter E. Williams:Edit
- (a) Is it possible to have a situation of general equilibrium without having all individual optimality conditions fulfilled? Explain.
- (b) Is it possible to have all individual optimality conditions fulfilled without the state of the system as a whole being Pareto optimal? Explain.
- (a) No – General Equilibrium in a competitive market means there are no remaining unexploited gains from trade. It requires that all markets clear and that all individuals have maximized their utility by trading their initial endowments until the point where equilibrium has been reached. This optimal point occurs where an individual feels he can no longer gain from further exchange. No further trading opportunities exist.
- (b) No – if all individual optimality conditions are fulfilled, then there no longer exist possible gains from trade. This means that each individual has traded as much as he wants, and finds no further trades to be of benefit. Therefore, no further trade can occur which make one person better off without making another person worse off.
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