Paradoxes have always been a fresh air to our knowledge boxes at all times. Then why not check out certain Paradoxes in ECONOMICS. Out of nearly 30 (or more) Economic paradoxes discovered so far, we the students of S.S. College of Business Studies (SSCBS), University of Delhi (DU) chose to present certain interesting, relevant yet easy to understand paradoxes which can be found in ECONOMICS! Hope you all find it useful. Kindly get in touch for feedbacks.

1. Or Paradox of Economy
ECONOMICS PARADOXES
Simran Soni-13292
Suman Raj-13298
BMS 2F

3. PARADOX?
The term Paradox is from the Greek word “paradoxon” that
means contrary to expectations, existing belief or perceived opinion.
It is a statement that appears to be self-contradictory or silly but
may include a latent truth. It is also used to illustrate an opinion or
statement contrary to accepted traditional ideas. A paradox is
often used to make a reader think over an idea in innovative way.

4. 1. GIFFEN GOODS
• A good for which demand increases as the price increases, and
falls when the price decreases. A Giffen good has an upward-
sloping demand curve, which is contrary to the fundamental law
of demand.
• A Giffen good is typically an inferior product that does not have
easily available substitutes, as a result of which the income effect
dominates the substitution effect. Giffen goods are quite rare, to
the extent that there is some debate about their actual existence.
The term is named after the economist Robert Giffen.

5. • A more recent – and perhaps better – example of a Giffen good is offered by
a 2007 study by Harvard economists Robert Jensen and Nolan Miller. Jensen
and Miller conducted a field experiment in two provinces in China – Hunan,
where rice is a dietary staple, and Gansu, where wheat is the staple.
Randomly selected households in both provinces were given vouchers that
subsidized their purchase of the staple food.
• The economists found strong evidence of Giffen behavior exhibited by
Hunan households with respect to rice. Lowering the price of rice through
the subsidy caused reduced demand by households for rice, while
increasing the price (by removing the subsidy) had the opposite effect. The
evidence with regard to wheat in Gansu was weaker because two of the
basic conditions for Giffen behavior were not fully observed, i.e. that the
staple good should have limited substitution, and households should be so
poor that they consume only staple foods.

6. ARROW’S IMPOSSIBILITY THEOREM
• A social-choice paradox illustrating the impossibility of having
an ideal voting structure that is reflective of specific fairness
criteria, such as Pareto efficiency. Arrow's impossibility theorem
states that a clear order of preferences cannot be determined
while adhering to mandatory principles of fair voting
procedures.

7. • For example, the following shows the type of problem typical of
an election. Consider the following example, where voters are
asked to rank their preference of candidates A, B and C:
45 votes A > B > C (45 people prefer A over B and prefer B over C)
40 votes B > C > A (40 people prefer B over C and prefer C over A)
30 votes C > A > B (30 people prefer C over A and prefer A over B)

8. DOLLAR AUCTION
• The dollar auction is a non-zero sum sequential game designed
by economist Martin Shubik to illustrate a paradox brought
about by traditional rational choice theory in which players
with perfect information in the game are compelled to make an
ultimately irrational decision based completely on a sequence
of rational choices made throughout the game

9. • The setup involves an auctioneer who volunteers to auction off
Rs 100 with the following rule:
• the bill goes to the winner; however, the two highest bidders
must pay the highest amount they bid.
• The winner can get the amount for a mere five rupees, but only if
no one else enters into the bidding war. The second-highest
bidder is the biggest loser by paying the top amount he or she
bid without getting anything back.
• The game begins with one of the players bidding five rupees (the
minimum), hoping to make a ninety-five-rupees profit.

10. EASTERLIN PARADOX
• The Easterlin Paradox concerns whether we are happier and more
contented as our living standards improve.
• In the mid 1970s Richard Easterlin drew attention to studies that
showed that, although successive generations are usually more
affluent that their parents or grandparents, people seemed to be no
happier with their lives? It is an interesting paradox to study when
you are writing about measuring economic welfare and the standard
of living.
1) Within a society, rich people tend to be much happier than poor
people.
2) But, rich societies tend not to be happier than poor societies (or not
by much).
3) As countries get richer, they do not get happier.

11. • Easterlin argued that life satisfaction does rise with average
incomes but only up to a point. Beyond that the marginal gain in
happiness declines.
• One of Easterlin’s conclusions was that relative income can
weigh heavily on people’s minds.
• Faced with this choice what would you rather have?
You get Rs 5,000 and a friend gets Rs 3,000
or
You get Rs 10,000 and a friend gets Rs 15,000

12. RESOURCE CURSE
• A paradoxical situation in which countries with an abundance of non-
renewable resources experience stagnant growth or even economic
contraction. The resource curse occurs as a country begins to focus all of its
energies on a single industry, such as mining, and neglects other major
sectors.
As a result, the nation becomes overly dependent on the price of
commodities, and overall gross domestic product becomes extremely
volatile. Additionally, government corruption often results when proper
resource rights and an income distribution framework is not established in
the society, resulting in unfair regulation of the industry.
• The resource curse is most often witnessed in emerging markets following
a major natural resource discovery.

13. • A commonly cited example of the resource curse is the Dutch disease,
a situation which occurred in the Netherlands following a large
natural gas find. The steps of the Dutch disease include:
1. A nation finds ample natural resource reserves
2. Economic focus begins to target this high-income industry
3. Skilled workers from other sectors transfer to the resource sector
4. Higher wages make the national currency less competitive
5. Other industries, especially the manufacturing sector, begin to
suffer
Both, the Dutch disease and the resource curse have a paradoxical
impact on the overall economy following the discovery of large
natural resource reserves.

14. ICARUS PARADOX
• The term refers to the phenomenon of businesses failing
abruptly after a period of apparent success, where this failure is
brought about by the very elements that led to their initial
success.
• Danny Miler undertook this study when he saw the trend of
Fortune 100 in 1996. he observed that 66 no longer existed till
2006, 15 still existed but were no longer on list and only 19
remained on list.

15. • Overconfidence and complacency
• Natural tendency
• Competitor neglect
• Organisational pressure
• Dogma, ritual and specialisation
• Relationship becomes shackles

16. TRIFFIN DILEMMA
• The Triffin dilemma or paradox is the conflict of economic
interests that arises between short-term domestic and long-term
international objectives when a national currency also serves as
a world reserve currency.
• The dilemma of choosing between these objectives was first
identified in the 1960s by Belgian-American economist Robert
Triffin. He pointed out that the country whose currency, being
the global reserve currency, foreign nations wish to hold, must
be willing to supply the world with an extra supply of its
currency to fulfill world demand for these foreign exchange
reserves, and thus cause a trade deficit.

17. Example: If US is in a recession and it is better for money supply to
be increased in the US, the policies pursued would also cause
excessive liquidity in the global market (weakening the value of
everyone's reserve)
This paradox is attributed with the reason for 2008 meltdown.