On Using a Barter Edgeworth Box to Discuss Efficiency Early in the Semester

Stephen Erfle
2015 Journal of Economic Education  
A cornerstone of economic analysis is the Pareto criterion for economic efficiency. Introductory and intermediate microeconomics texts discuss Pareto (economic) efficiency very early in the text but relegate a formal treatment to near the end of the text. The connection between distributive efficiency and exchange can be brought into closer relief by employing a barter Edgeworth box as soon as students have been introduced to preferences and their graphical representation as indifference
more » ... indifference curves, even before students learn about utility functions or budget constraints. Bringing this discussion forward creates a quick linkage between their childhood intuition that trading with their peers often makes them better off and how economists model such trades as Pareto superior redistributions of goods. The Edgeworth box elegantly illustrates the power of using simplifying assumptions (two individuals, two goods) to build an economic model. The story presented is readily remembered. Most students recall going trick-or-treating and trading afterward. Annie ends with lots of gummis, Bob has lots of chocolate. They will likely trade so that each achieves a more balanced distribution of candy. The BarterEdgeworthBox.xlsx file allows you to build the box and model trading in class via computer projection without having to spend class time drawing the box. Separate sheets show this analysis with two separate graphs and, more elegantly, as an Edgeworth box. Each interactive graph allows the user to add or remove axes, individual curves, and change allocations and relative bargaining strength via sliders. The file includes a separate introduction sheet with static graphs and questions, glossary, answer key and instructor notes. This file is 2 | P a g e appropriate for introductory classes using indifference curves and all intermediate classes. Although this can be used on its own, it works best if it is introduced as part of a lecture prior to student distribution for exploration or homework.
doi:10.1080/00220485.2015.1071225 fatcat:gyaw6lf6bnbajmmzp2obaapw3y