Endowment Effects in Competitive General Equilibrium: A Primer for Paretian Policy Analysts

Abstract

General competitive equilibrium theory establishes interdependency between input (wealth) distribution amongst consumers-as-owners, and the equilibrium output mix and relative prices for inputs and outputs in a market economy. We give a portrayal of these interdependencies—considered as “endowment effects”—suitable for undergraduate teaching. With a Cobb-Douglas 2-input, 2-good, 2-consumer model having input-specialization and non-alike consumer preferences, equilibrium prices and output levels are monotonic one-to-one functions of income shares, which are in turn monotonic functions of the endowments of consumers-as-owners. An “Endowment Box” provides the framework for portraying these “endowment effects” graphically.