Price-Taking in General Equilibrium

Abstract

The Arrow-Debreu and McKenzie existence propositions of 1954 rest on the assumption of price-taking behaviour by households and firms. No attempt was made to justify the assumption or to relate it to other assumptions. It is here suggested that, given other assumptions common to the Arrow-Debreu and McKenzie models, price-taking implies that each household is incompletely informed and/or incompletely rational. By implication, complete information and complete rationality can be combined with price-taking only at the expense of internal consistency. On the other hand, given a suitable degree of ignorance and/or irrationality, both existence and the two fundamental welfare propositions remain intact.