General Equilibrium Foundation of Partial Equilibrium Analysis

1. Front Matter

   Pages i-xiv

   PDF

2. Introduction

   • Takashi Hayashi

   Pages 1-6

3. General Equilibrium Theory

   • Takashi Hayashi

   Pages 7-35

4. Income Evaluation of Welfare Change: Equivalent Variation, Compensating Variation, and Consumer Surplus

   • Takashi Hayashi

   Pages 37-69

5. The Assumption of No Income Effect and Quasi-linear Preferences

   • Takashi Hayashi

   Pages 71-92

6. Is the Approximation Error Large or Small?

   • Takashi Hayashi

   Pages 93-97

7. Small Income Effects

   • Takashi Hayashi

   Pages 99-136

8. Partial Equilibrium Welfare Analysis Under Uncertainty

   • Takashi Hayashi

   Pages 137-162

9. Mechanism Design in Partial Equilibrium

   • Takashi Hayashi

   Pages 163-180

10. Back Matter

    Pages 181-185

    PDF

This book addresses the gaps in undergraduate teaching of partial equilibrium analysis, providing a general equilibrium viewpoint to illustrate the assumptions underlying partial equilibrium welfare analysis. It remains unexplained, at least at the level of general economics teaching, in what sense partial equilibrium analysis is indeed a part of general equilibrium analysis. Partial equilibrium welfare analysis isolates a market for a single commodity from the rest of the economy, presuming that other things remain equal, and measures gains and losses by means of consumer surplus. This is a money metric that is supposed to be summable across individuals, recommending policy that maximizes the social surplus. But what justifies such apparently uni-dimensional practise? Within a general equilibrium framework, the assumption of no income effect is presented as the key condition, and substantive general equilibrium situations in which the condition emerges are presented. The analysis is extended to the case of uncertainty, in which the practice adopts aggregate expected consumer surplus, and scrutinizes when such practice is justified. Finally, the book illustrates partial equilibrium as an institutional artifact, meaning that institutional constraint induces individuals to behave as if they are in partial equilibrium. This volume forms an important contribution to the literature by researching why this disparity persists and the implications for economics education.

• Mechanism design
• Imperfect competition
• Vives approach
• Monopoly
• Oligopoly
• Cardinal utility
• Income
• Hicksian presentation
• Welfare analysis
• Consumer surplus
• Social surplus
• Uncertainty

• Adam Smith Business School, University of Glasgow, Glasgow, United Kingdom

  Takashi Hayashi

Takashi Hayashi is Professor in Economics at the Adam Smith Business School, University of Glasgow, Scotland. He works on microeconomic theory, in particular decision theory and welfare economics. He has regularly published articles in scholarly journals such as Econometrica, Journal of Economic Theory and Theoretical Economics.

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