Normative Equilibrium: The permissible and the forbidden as devices for bringing order to economic environments

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We introduce the notion of a “normative equilibrium” as a method which brings harmony to “general equilibrium” like environments where individuals make preference-maximizing choices but not every profile of choices is feasible. In an equilibrium, norms stipulate what is permissible and what is forbidden. These uniform norms play a role analogous to that of price systems in competitive equilibrium and also feature some element of “fairness” since all individuals face the same choice set. The solution concept is a maximally permissive set of alternatives that is consistent with the existence of a profile of optimal choices which is feasible. Properties of the solution concept are analysed and the concept is applied to a variety of economic settings.