Chapter 18 Core of an economy

Abstract

The core of an economy consists of those states of the economy that no group of agents can improve upon. A group of agents can improve upon a state of the economy if the group, by using the means available to it, can make each member of that group better off, regardless of the actions of the agents outside that group. This chapter explains that the core of an economy might be empty. But if an allocation in the core exists at all, there are, in general, many such allocations. The core is a rather theoretical equilibrium concept. It is used to provide a theoretical foundation of a more operational equilibrium concept—the competitive equilibrium—which, in fact, is a very different notion of equilibrium. The allocation process is organized through markets; there is a price for every commodity. All economic agents take the price system as given and make their decisions independent of each other. The equilibrium price system coordinates these independent decisions in such a way that all markets are simultaneously balanced. A state of the economy that is decentralized by an equilibrium price system cannot be improved upon by cooperation. This proposition strengthens the well-known proposition of welfare economics to the case where ownership in initial endowments is not collective but individual. For economies with a finite number of participants, the influence of every agent is not strictly negligible, and the core is larger than the set of competitive equilibria.