Sequential Model of Economic System and Constrained Pareto Optimality

Abstract

The concept of general economic equilibrium of sequential structures of economic system involves development of the general economic equilibrium model that includes the structure of asset markets. The assets are instruments of income redistribution through the different states of nature of economic system. General economic equilibrium model with the asset markets should provide, on the one hand, an explanation of the relative prices of commodities and, on the other hand, the possibility of analyzing income transfers through the different states of nature and the process of asset prices formation. After defining the appropriate general economic equilibrium model which involves asset markets in the absence of arbitrage process, further analysis is focused on the examination of Pareto optimality of economic system. The existence of imperfect market conditions in the form of incomplete asset markets reduces possibility of income transfers through the different states of nature of economic system, which results that equilibrium allocation is not Pareto optimal allocation. Therefore, in this paper focus is on a constrained form of Pareto optimality in a sequential model of economic system.

Keywords

• general equilibrium model
• incomplete asset markets
• existence of solution
• pareto optimality.