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Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics

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  • Makowski, Louis
  • Ostroy, Joseph M

Abstract

The first theorem of welfare economics rests on the assumption that individuals have neither price-making nor market-making capacities. The authors offer a revision in which individuals have such capacities. The revision emphasizes two keys for market efficiency: the need to align private rewards with social contributions--called full appropriation--and the need for an assumption to counter the possibility of coordination failures in the choice of produced commodities--called noncomplementarity. The authors also emphasize that information about prices of unmarketed commodities involves decentralized knowledge available only to product innovators and that pecuniary externalities are important potential sources of market failure. Copyright 1995 by American Economic Association.

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  • Makowski, Louis & Ostroy, Joseph M, 1995. "Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics," American Economic Review, American Economic Association, vol. 85(4), pages 808-827, September.
  • Handle: RePEc:aea:aecrev:v:85:y:1995:i:4:p:808-27
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    References listed on IDEAS

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    1. Joseph M. Ostroy, 1978. "The No-Surplus Condition as a Characterization of Perfectly Competitive Equilibrium," UCLA Economics Working Papers 139, UCLA Department of Economics.
    2. Louis Makowski & Joseph M. Ostroy, 1984. "Vickrey-Clarke-Groves Mechanisms and Perfect Competition," UCLA Economics Working Papers 333, UCLA Department of Economics.
    3. Makowski, Louis & Ostroy, Joseph M., 1987. "Vickrey-Clarke-Groves mechanisms and perfect competition," Journal of Economic Theory, Elsevier, vol. 42(2), pages 244-261, August.
    4. Joseph M. Ostroy, 1977. "The No-Surplus Condition as a Characterization of Perfectly Competitive Equilibrium," UCLA Economics Working Papers 090, UCLA Department of Economics.
    5. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
    6. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
    7. Ostroy, Joseph M., 1980. "The no-surplus condition as a characterization of perfectly competitive equilibrium," Journal of Economic Theory, Elsevier, vol. 22(2), pages 183-207, April.
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