10. Market, Trade, and Welfare in General Equilibrium

The recent theoretical research in economics has paid much attention to imperfect competition and increasing returns to scale, uncovering new and useful findings about the market behavior of firms and their implications for economic welfare. More often than not, the analysis of these phenomena has been carried out within the framework of partial equilibrium models. This is a notable, and perhaps inevitable, turnabout from the dominance of general equilibrium analysis in the 1950s to 1970s. The traditional general equilibrium models à la Arrow and Debreu (1954) and McKenzie (1959) are appropriate for the proof of the existence of general equilibrium, but their generality restricts the comparative-static (or dynamic) analysis of practical economic problems even under the assumption of perfect competition. The same comment applies, a fortiori, to Negishi’s (1961) ingenious extension of the Arrow–Debreu model to the case of monopolistic competition. Although partial equilibrium models are useful for the analysis of a single industry (or a set of closely related industries), they are inadequate in addressing its relationships with the rest of the economy, both through their negligence of income effects and because of their loose recognition of the inter-industry flow of resources. I need to develop tractable general equilibrium models incorporating imperfect competition and increasing returns at the expense of generality. The present chapter takes a small step forward in this direction.