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'Use the Edgeworth Box diagram to explain how gains from trade arise. If the outcome of such trade is Pareto Optimal government intervention is unnecessary and undesirable.' Discuss.
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Essay 10: 'Use the Edgeworth Box diagram to explain how gains from trade arise. If the outcome of such trade is Pareto Optimal government intervention is unnecessary and undesirable.' Discuss. To answer this question I first need to generally outline how an Edgeworth Box is formed, how initial endowments are represented, the uses of the Edgeworth box, and then go on to explain, using this valuable tool, how gains from trade arise. When using the Edgeworth Box we have to imagine a simple economy: one with only two consumers, Alex and Ben (A and B), and only two goods, good 1 and good 2. We also have to imagine an economy with no production; instead the goods arrive in fixed quantities in each time period, as initial endowments, ?. This means that there is a fixed amount of goods that are exchanged. The amount that person A holds of a good...
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