An Introductory General Equilibrium Model for Undergraduate Economics Students

A two-sector general equilibrium model is presented. In the absence of externalities and public goods, the solution for market consumption and production would be the same as that of a hypothetical central planner if the fiscal balance is in equilibrium and there is a uniform consumption tax across all goods. Next, the effect of a negative externality generated by the consumption of one of the goods is analyzed. In this case, the optimal solution would be to establish a higher consumption tax rate for the good that generates the externality. Finally, the possibility of public goods is examined. Here, the optimal solution is for the government to set a target for the provision of these goods and generate fiscal resources to meet it, while maintaining a uniform consumption tax on all private goods.