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# General Equilibrium Simulation for Microeconomics

#### Summary

Teaching general equilibrium analysis to students is challenging. General equilibrium models are typically accessible to only a small handful of mathematically well prepared students. Yet the growing significance of general equilibrium models in economics challenges instructors to find ways to make these models accessible to undergraduate students. The simulation gives microeconomics instructors an alternative to the traditional Edgeworth box graphical presentation. The simulation, with sample parameter files, is implemented with a Java applet available at General Equilibrium Simulations. The developers of the simulation are Walter Nicholson and Frank Westhoff at Amherst College.

## Learning Goals

Intermediate microeconomics instruction has lagged behind the importance of general equilibrium models in economic analysis. Very few of the existing texts include a modern presentation of how general equilibrium models work. If a discussion is included, it is most likely to be based on a graphical analysis using an Edgeworth box. The goal of the simulation is to match the simulation results with a set of economic results that are reflective of general equilibrium analysis. The specific general equilibrium results are:
• Prices are endogenous variables. Household preferences and endowments and production technology are exogenous variables.
• Firms are owned by households, and firm revenues are distributed to households.
• Government is subject to a budget constraint.
• Household utility is the critical variable for assessing policy options.
• Real world taxes are distorting.
• There should be a correspondence between general equilibrium analysis and cost-benefit analysis.

## Context for Use

The simulation is most appropriate for an intermediate microeconomics course. It is also relevant for instructors who wish to introduce some general equilibrium analysis into a public choice, environmental economics, resource economics, or international trade course. The Java applet nature of the simulation makes it useful for both large and small classes.

## Description and Teaching Materials

An instructor thinking about using the simulation should begin by read the Journal of Economic Education article associated with the simulation. A link to the article is given in the reference section below. The next step is to read the documentation on the General Equilibrium Simulations web site. The first section of the documentation gives a brief presentation of the structure and parameters of the model. The second section discusses the "nuts and bolts" of using the simulation program. A potential user should start by modifying one of the existing files as opposed to jumping in with an entirely new information set. The first step in entering information is to specify the number of private goods, the number of households, and the number of private firms. The second step focuses on specifying the model's parameters. The simulation is very direct and easy to use once its structure is understood.

TIME REQUIREMENTS:
Instructor preparation: Approximately two hours to read the article and learn to use the applet.
Class preparation: The minimum time to introduce the topic of general equilibrium analysis is one 50 minute class period.
Class simulation: One or two 50 minute class periods, depending on instructor preference and choice of topics.

## Teaching Notes and Tips

From an implementation perspective, most instructors familiar with similar simulations will worry about the program freezing because it cannot find an equilibrium. The Advanced Help screen provides advise on what to do in such cases. The default solution tool is Merrill's refinement of Scarf's algorithm.

The Nicholson and Westhoff article presents five examples using the simulation, all of which are easily implemented in the classroom.
• Interconnectedness of Markets.
• Tax Equivalence
• Lump Sum Versus Distoring Taxes
• Financing and the Optimal level of Public Goods Production
• Externalities and Efficiency
Each example is discussed in detail, and instructors can quickly reproduce the results and introduce their own assumptions.

## Assessment

All traditional assessment tools can be used. For more information about assessment, see the SERC assessment module.

## References and Resources

Nicholson, W., and F. Westhoff. General Equilibrium Models: Improving the Microeconomics Classroom. Journal of Economic Education, 40(3), 297-314.

Mixon, J. W. Jr., and B. N. Hopkins. General Equilibrium Analysis using Microsoft Excel. Journal of Economic Education, 39(4), 403.

Edgeworth box applets and problems:
UCLA microeconomics principles applet
EconPort:Costless Public Good; A Water-Level Example