Undominated prices in the three good model

Abstract

Any movement away from Walrasian prices will make somebody worse off. We ask: Which other prices share this property? The paper characterizes the set of such prices, called 'undominated prices', for the three good economy (output, labor and a nonproduced good) that is now well known from the work of Barro-Grossman, Benassy and Malinvaud. We consider two groups of consumers: workers and shareholders. We show that, under some conditions, there exist prices and wages that generate unemployment and are undominated. This requires that (a) workers be poorly endowed with the nonproduced good, (b) there be little substitution in consumption between the produced and the nonproduced good, and (c) the market for the produced good be balanced (i.e., prices equal marginal costs). © 1988.