Partial equilibrium models of markets, or of systems of related markets, determine prices, profits, productions, and the other variables of interest adhering to the assumption that there are no feedback effects from these endogenous magnitudes to the underlying demand or cost curves that are specified in advance. Individuals wealth is another variable that GE theory regards as endogenously determined but that is often treated as exogenous in partial equilibrium analysis. This consumption good, which is identical across towns, is traded in a national market. The overall economy has M units of labor, inelastically supplied by workers who derive utility only form the output of the firms.
Workers are free to move from town to town and do so to seek the highest wage.
We normalize the price of consumption good to be 1, and we denote the wage rate in town n s labor market by wn. If town 1 levies a tax t on the labor used in the firm located there. Since N is large, we can approximate and take the wage rate elsewhere, w to be unaffected by this change in town 1. Income of workers remains unchanged as does the profits of firms not located in town 1. Only the profits of firm in town 1 decreases.