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I think in real endowment model, if there's trade cost as 't', then the MRS should be really small or large to make a consumer trade his endowment goods. Is there any model include this trade cost or market tax?

If it's true I think we can examine how much 't' can make a consumer not to use market and that can bring decrease in market exchange. So government can focus on decreasing 't' to the level of free trade(technological or even the number of markets).

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You can easily think of an endowment economy with taxes, and think of the taxes as transaction costs or trading costs. I'm sure classic textbooks like Mas-Collel address this point, perhaps in an exercise. Your intuition is right, the larger "t" is, the more deadweight loss there is, and this is reflected by transactions that do not occur. A large enough "t" can prevent all transactions from occurring, just as a large enough tax can kill a market.

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  • $\begingroup$ If you think I've answered your question, marking officially accepting my answer will be greatly appreciated. :) $\endgroup$ – Regio May 1 '19 at 0:43

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