Throw away paradox

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In economics, the throw away paradox is a situation in which a person can gain by throwing away some of his property. It was first described by Robert J. Aumann and B. Peleg [1] as a note on a similar paradox by David Gale. [2]

Contents

Description

There is an economy with two commodities (x and y) and two traders (e.g. Alice and Bob).

Details

The paradox happens in the following situation. Both traders have the same utility function with the following characteristics:

One such function is , where is a certain parameter between 0 and 1, but many other such functions exist.

The explanation for the paradox is that when the quantity of x decreases, its price increases, and the increase in price is more than sufficient to compensate Alice for the decrease in quantity.

See also

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References

  1. Aumann, R.J.; Peleg, B. (1974). "A note on Gale's example". Journal of Mathematical Economics. 1 (2): 209. doi:10.1016/0304-4068(74)90012-3.
  2. Gale, David (1974). "Exchange equilibrium and coalitions". Journal of Mathematical Economics. 1: 63–66. doi:10.1016/0304-4068(74)90036-6.