Nonrepresentative Representative Consumers
Single consumer models are often used to focus attention on economic efficiency, leaving aside equity considerations. In general, these ¡°representative consumer" models do not accurately portray the effects of changes in policies, endowments or technology in the multi-consumer economies they are meant to represent; but even when they do, they are not necessarily adequate for evaluating efficiency. The representative consumer can be Pareto inconsistent, preferring a situation B to A even though all the consumers in the represented economy prefer A to B. It is not clear from the literature how serious a defect this can be. The known examples of Pareto inconsistency are not robust. Small changes in the consumers' preferences remove the Pareto inconsistency. It has been an open question whether large robust Pareto inconsistencies are possible. This paper shows that they are. In one example, the actual consumers require 56% more income than the representative consumer requires in order to be compensated for the doubling of a price. But such large Pareto inconsistencies require that there is a Giffen good for the representative consumer. We argue that the inconsistencies of representative consumers in most macroeconomic applications are likely to be small and we give conditions ruling out inconsistencies entirely.
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A.|
Phone: (518) 442-4735
Fax: (518) 442-4736
|Order Information:|| Postal: Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A.|
Web: http://www.albany.edu/economics/research/workingp/index.shtml Email:
When requesting a correction, please mention this item's handle: RePEc:nya:albaec:06-08. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John Bailey Jones)
If references are entirely missing, you can add them using this form.