A measure of social loss for production economies with externalities

Abstract

AbstractIn this paper we consider a production economy and adopt a cooperative approach to equilibrium analysis which allows each individual to cooperate with others and to form a coalition whose members have access to the available technologies. We investigate the behavior of the core defined with respect to preferences (preferences-core) and with respect to resources (resources-core). We introduce a measure of social loss with respect to the core of the production economy which characterizes the corresponding core allocations. Our definition of the core requires that coalitions proposing a deviation take into account the consequences that changes in production plans may have for the counter-coalitions (considerate dominance). Our characterization holds in the presence of consumption externalities and an optimistic or a pessimistic attitude of coalition agents with respect to the behavior of outsiders.