Working Paper 436

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On Characterizing Equilibria of Economies With Externalities and Taxes as Solutions to Optimization Problems

Timothy J. Kehoe - Consultant
David K. Levine - Visiting Scholar
Paul M. Romer

Published November 1, 1990

Abstract
We characterize equilibria of general equilibrium models with externalities and taxes as solutions to optimization problems. This characterization is similar to Negishi’s characterization of equilibria of economies without externalities or taxes as solutions to social planning problems. It is often useful for computing equilibria or deriving their properties. Frequently, however, finding the optimization problem that a particular equilibrium solves is difficult. This is especially true in economies with multiple equilibria. In a dynamic economy with externalities or taxes there may be a robust continuum of equilibria even if there is a representative consumer. This indeterminacy of equilibria is closely related to that in overlapping generations economies.


Published In: Economic Theory (Vol. 2, No. 1, January 1992, pp. 43-68)

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