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Are Unrealistic Assumptions/Simplifications Acceptable? Some Methodological Issues in Economics
Author(s) -
Ng YewKwang
Publication year - 2016
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12163
Subject(s) - economics , neutrality , equivalence (formal languages) , imperfect competition , mathematical economics , common value auction , context (archaeology) , microeconomics , econometrics , mathematics , paleontology , philosophy , epistemology , discrete mathematics , biology
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 non‐neutrality of money) of perfect versus imperfect competition in macroeconomics with important real‐world policy relevance are also used to illustrate the point.