The Boadway Paradox Revisited: The Case of Compensated Equilibrium

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See all articles by Per-Olov Johansson

Per-Olov Johansson

Stockholm School of Economics

Bengt Kriström

SLU- Centre for Environmental and Resource Economics (CERE)

CERE Center for Environmental and Resource Economics

CERE

Date Written: June 13, 2022

Abstract

The Boadway paradox, named after its discoverer, the well-known Canadian economist Robin Boadway, points at an inherent flaw in the concepts of compensat- ing variation (CV) and equivalent variation (EV). A redistribution of endowments across agents has no e ciency impact. Nevertheless, the aggregate CV (EV) turns out to be non-negative (non-positive), and in general strictly positive (negative) for discrete redistributions.
In this paper we draw on the concept of compensated equilibrium and show that in such a context a pure redistribution in a multi-agent, multi-commodity society causes the aggregate CV to equal zero (and coincide with the aggregate EV). Hence, the measure correctly reflects the fact that gainers are unable to compensate losers and still gain. Previous authors, claiming that they have resolved the paradox, have used Edgeworth boxes to arrive at a graphical result for a two-commodity, two-agent society.
We also show that the CV based on compensated equilibrium correctly captures the sign of the value of marginal as well as non-marginal changes in endowments. The latter is not the case for the measure based on Marshallian concepts.
In addition, the paper provides a generalization from a pure exchange economy to a production economy.

Keywords: Boadway paradox, compensated equilibrium, compensating variation, equivalent variation, endowments, distribution.

JEL Classification: D50,D61

Suggested Citation

Johansson, Per-Olov and Kriström, Bengt and Center for Environmental and Resource Economics, CERE, The Boadway Paradox Revisited: The Case of Compensated Equilibrium (June 13, 2022). Available at SSRN: https://ssrn.com/abstract=

Per-Olov Johansson

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
SWEDEN
+46 8 736 92 82 (Phone)
+46 8 30 21 15 (Fax)

Bengt Kriström

SLU- Centre for Environmental and Resource Economics (CERE) ( email )

Umea, 901 83
Sweden
+46-(0)90-7865219 (Phone)

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