I am analyzing a 2-person, 2-good Edgeworth box economy where one individual has Leontief preferences and the other has linear preferences, and I ran into a conceptual roadblock regarding the strict definition of "trade" vs. "Pareto improvement."
The Setup:
* Person 1 Preferences: U1 = X1 + Y1
* Person 2 Preferences: U2 = min(X2, Y2)
Because Person 2 has Leontief preferences, any allocation off their "kink line" means they hold an excess of one good that provides them with exactly 0 marginal utility.
The Scenario:
Suppose we are at an allocation where Person 2 has excess Y (so Y2 > X2). Those extra units of Y are essentially "worthless" to them. If Person 2 were to simply give this excess Y to Person 1 for absolutely nothing in return, Person 1's utility would increase, and Person 2's utility would remain exactly the same.
My Questions:
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One-Way Transfers: Colloquially, "trade" implies a mutual exchange where both parties give and receive. In general equilibrium theory, is a completely one-sided transfer (giving away a good with zero marginal utility for free) allowed to be considered a Pareto improvement? If so, does this strictly rule out any points off the Leontief kink line from being part of the Pareto optimal contract curve?
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The Definition of "Trade" vs. "Optimality": If I explicitly define a "trade" strictly as a scenario where both parties must receive something in a two-person world, when does Pareto optimality fail to guarantee that such a trade exists? Put another way, are there standard economic scenarios where the only path to the Pareto optimal set requires these one-sided "gifts" rather than mutually compensated exchanges?
Would appreciate any insights from a rigorous micro theory perspective!
Conceptual question on Pareto Optimality: Are one-way transfers valid "trades", and does PO always guarantee mutual exchange?
byu/Additional_Guide5439 inAskEconomics
Posted by Additional_Guide5439