Daniel,

Nice one, but not as well-formulated as either Coase or Wicksteed. It may also provide an interesting bridge between Coase’s theory of the firm and his theory of social cost, but I will have to think about that one.

“Now, under one ownership, their relations would, *given competitive institutions*, be exactly the same, provided that both methods were equally efficient from the social standpoint. There is no reason why the spreading of the lines of responsibility back to several sources should lead to less effective planning than subordinacy to an authority emanating from one source, given the equal availability of relevant knowledge to the managers who devise the plans…The most important *significant* difference between the two cases is that, in practice, in the one case there may not be the availability of relevant knowledge that there is in the other.”

Ksovim, Coase and Wicksteed both recognized that the proposition that final equilibrium is independent of the initial distribution is only true when demand is unaffected by the initial distribution of goods or rights. There are some assumptions that can be made to guarantee that result, but you are correct that in general they don’t hold. But they both made the assumption for expository convenience.

]]>I may be misunderstanding this, but I do not think Wicksteed’s argument then is correct in a general equilibrium model. With quasi-linear utility, yes, equilibrium is unaffected by initial allocation, just as with the Coase theorem version mentioned. But if quasi-linear utility cannot be assumed, then I do not think this is true in Walrasian general equilibrium.

Is the argument that this traditional general equilibrium understanding is wrong – that initial distribution does not matter?

]]>“My comment was aimed at the notion that a general equilibrium can be characterized as the tangency of a PPC with an indifference curve.”

I was thinking of general equilibrium as a community PPC being tangent to a community indifference curve (CIC). I’ve never seen textbooks describe it this way, so if my description below isn’t clear I can email you a drawing.

A CIC (which I first saw in Alchian’s 201A class) is drawn by turning B’s indifference curve upside down, placing it tangent to A’s indifference curve at an arbitrary point, holding an imaginary pencil at B’s origin, and sliding B’s indifference curve up and down A’s indifference curve, keeping them tangent. Your pencil will trace out the CIC.

To show general equilibrium, start with a CPPC (described in my old comment). Inscribe an Edgeworth box inside that CPPC. When we are in general equilibrium, the indifference curves of A and B will be tangent to each other, and the PPC’s of A and B will also be tangent to each other. Furthermore, the slopes of the PPC’s will equal the slopes of the indifference curves (at the point of tangency), and also equal to the slope of the CPPC.

Finally, focus in on the tangengy of the two indifference curves. Place an imaginary pencil at B’s origin, and imagine sliding B’s indifference curve up and down along A’s indifference curve, keeping them tangent. You imaginary pencil will trace out the CIC, and the CIC will be tangent to the CPPC, thus picturing general equilibrium without requiring everyone’s indifference curves to be the same.

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