Microeconomics: Theory and Applications with Calculus, 4e

10.2 Trading Between Two People

In Chapter 9, we showed that tariffs, quotas, and other trade restrictions usually harm both importing and exporting nations because people who voluntarily trade benefit from that trade—otherwise, they would not have traded. In this section, we use a general-equilibrium model to show that free trade is Pareto efficient: After all voluntary trades occur, no reallocation of goods is possible that makes one person better off without harming another. Our analysis demonstrates that trade between two people is Pareto efficient and that the same property holds when many people trade in a competitive market.

Endowments

Suppose that Jane and Denise are neighbors in the wilds of Massachusetts. A nasty snowstorm hits, isolating ...