Necessary and Sufficient Conditions for Efficiency in an Economy with an Incomplete Set of Markets

Considerable attention has recently been focused on examining an economy in which there is not a complete set of markets. The nonexistence of certain markets is typically explained by either the presence of transaction costs or, in the case of contingent commodities, by a moral hazard argument. If, however, an efficient allocation of resources is achieved whenever certain markets are not present, it may be argued that the failure of these markets to exist occurs simply because they are not needed. Indeed, no trade would occur in these markets even if they were established since all individuals have imputed the same price to each nontraded commodity. The characterization of such an economy is the case with which this paper is concerned.