The Number of Goods as a Welfare Variable: A Simplified Graphic Approach
Trade, the Internet, and product innovation have greatly enlarged the number of goods (<italic>N</italic>) in the consumer's choice set. The welfare effect of the growth in <italic>N</italic> has been extensively discussed in the specialized literature, but very little has filtered down to our textbook models of a competitive equilibrium. These focus on the Pareto-optimal allocation of resources for a given <italic>N</italic>, avoiding the problem of the optimum number of goods, or the welfare gains when the optimum number is increased through trade. This neglect stems from the limitations of our partial-equilibrium analytical tools—for example, indifference maps in which <italic>N</italic> is fixed. The authors fill this gap in the Hicksian ordinal revolution by developing new indifference curves that express <italic>N</italic> as a variable, thus allowing them to estimate the variety gains from trade and the real-income gains as new goods enlarge <italic>N</italic> and to use new <italic>pp</italic> curves to provide a graphic description of the optimum number of goods in a competitive economy.
Year of publication: |
2008
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Authors: | Paglin, Morton ; Paglin, Mark |
Published in: |
The Journal of Economic Education. - Taylor & Francis Journals, ISSN 0022-0485. - Vol. 39.2008, 4, p. 374-390
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Publisher: |
Taylor & Francis Journals |
Saved in:
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