Abstract
The chapter explores the effects of uncertainty on welfare, resource allocation, and income distribution within the context of a simple competitive general equilibrium model. The traditional static two-factor-two-good model in the presence of uncertainty in the production process has been investigated, and it has been assumed that in the short run, the allocation of capital between two industries is fixed and that economic agents make their decisions with respect to production and labor input under certainty. The chapter describes the effects of uncertainty under two alternative assumptions about the technology. In the first model, it is assumed that the basic random variable is the total supply of labor services. The supply may be random as a result of the variability in the number of workers in the labor force or, more plausibly, as a result of the variability in the efficiency of a fixed labor force.
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