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The Economy's Potential: Duality and Equilibrium

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  • Jacob K Goeree

Abstract

I introduce a concave function of allocations and prices -- the economy's potential -- which measures the difference between utilitarian social welfare and its dual. I show that Walrasian equilibria correspond to roots of the potential: allocations maximize weighted utility and prices minimize weighted indirect utility. Walrasian prices are "utility clearing" in the sense that the utilities consumers expect at Walrasian prices are just feasible. I discuss the implications of this simple duality for equilibrium existence, the welfare theorems, and the interpretation of Walrasian prices.

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  • Jacob K Goeree, 2022. "The Economy's Potential: Duality and Equilibrium," Papers 2210.14437, arXiv.org.
    • Handle: RePEc:arx:papers:2210.14437
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    References listed on IDEAS

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    1. Duffie, Darrell & Sonnenschein, Hugo, 1989. "Arrow and General Equilibrium Theory," Journal of Economic Literature, American Economic Association, vol. 27(2), pages 565-598, June.
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