Using a stylized model of the used car market, we extend the formal theory,
of the Austrian market process in three directions. First, we incorporate
the knowledge problem and entrepreneurial alertness for the discovery of pr
eviously unknown information. Second, we allow for the possibility that ent
repreneurs may make mistakes. Third, we describe the effect of entrepreneur
ial behavior on dis-equilibrium market adjustment. We give conditions under
which an equilibrium exists for an Austrian market process with these elem
ents and we analyze the stability properties of the equilibrium. Furthermor
e, we show that the model has interesting welfare properties- a commodity t
ax may increase or decrease welfare. Journal of Economic Literature Classif
ication Number: D50 (C) 2000 Academic Press.