NonconvexSecondWelfare

NonconvexSecondWelfare - Economics 201AFall 2005Second Half...

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Economics 201A–Fall 2005–Second Half The Second Welfare Theorem with Nonconvex Preferences This handout is based on Anderson, “The Second Welfare Theorem with Nonconvex Preferences,” Econometrica 56(1988), 361-382. As the diagram on page 2 shows, the second welfare theorem may fail if preferences are nonconvex. SpeciFcally, it gives an economy with two goods and two agents, and a Pareto optimum x so that so that the utility levels of x cannot be approximated by an Walrasian equilibrium with transfers; moreover, if p is the price which locally supports x ,and T is the income transfer which makes x a±ordable with respect to the prices p , there is a unique Walrasian equilibrium with transfers ( y ,q ,T ); y is much more favorable to agent I and much less favorable to agent II than
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NonconvexSecondWelfare - Economics 201AFall 2005Second Half...

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