Are unrealistic assumptions/simplifications acceptable? some methodological issues in economics

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Abstract

Are unrealistic assumptions acceptable? If results are not changed in a misleading way, they are acceptable. The same assumption may be acceptable in one context and not in another. Assuming identical pairs of individuals in the parity and limit theorems in general equilibrium theory is acceptable as results are not changed substantially. The alleged equivalence of the first-price and second-price auctions is based on misleading assumptions; Coase’s case against taxing pollution is based on a misleading all-or-nothing comparison. The contrasting results (neutrality versus nonneutrality of money) of perfect versus imperfect competition in macroeconomics with important real-world policy relevance are also used to illustrate the point.
Original languageEnglish
Pages (from-to)180-201
Number of pages22
JournalPacific Economic Review
Volume21
Issue number2
DOIs
Publication statusPublished - May 2016
Externally publishedYes

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