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By Dr. David Edward Marcinko MBA MEd
SPONSOR: http://www.MarcinkoAssociates.com
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A trader can gain by throwing away some of his/her initial endowment.
SAMPLE: There is an economy with two commodities (x and y) and two traders (e.g. Alice and Bob).
- In one situation, the initial endowments are (20,0) and (0,10), i.e, Alice has twenty units of commodity x and Bob has ten units of commodity y. Then, the market opens for trade. In equilibrium, Alice’s bundle is (4,2), i.e, she has four units of x and two units of y.
- In the second situation, Alice decides to discard half of her initial endowment – she throws away 10 units of commodity x. Then, the market opens for trade. In equilibrium, Alice’s bundle is (5,5) – she has more of every commodity than in the first situation.
The “throw away paradox” was first described by Robert J. Aumann and B. Peleg as a note on a similar paradox by David Gale.
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