61 Jevons Paradox (Rebound Effect)
When James W. Jevons studied Britain’s coal industry (1865) he noticed a counter-intuitive cycle: improvements in steam-engine efficiency lowered the cost of using coal-powered machinery, which in turn raised total coal demand nationwide. Efficiency that should have conserved the resource instead accelerated its depletion. Modern energy economics calls this the rebound effect. At a micro level, cheaper energy services spur consumers to use them more (turning up the thermostat, driving farther). At a macro level, lower costs stimulate new energy-intensive industries. Policies targeting conservation now adjust for rebound by coupling efficiency mandates with carbon pricing or caps to prevent “back-fire.”
62 Paradox of Thrift
Keynes observed that in a recession households logically cut spending to rebuild savings, yet if everyone thrifted simultaneously, aggregate demand collapsed, firms laid off workers, and national income fell—leaving lower total saving. The paradox shows that behaviour prudent for one household becomes harmful when generalised, because one person’s expenditure is another’s income. Fiscal-stimulus theory and automatic stabilisers (unemployment insurance, progressive taxes) are designed to offset this fallacy of composition.
63 Easterlin Paradox
Cross-section data reveal that richer individuals within a country report higher life satisfaction, but time-series data show that as average income per head rises over decades, average happiness often plateaus. Richard Easterlin argued that happiness depends on relative income and adaptation: material gains quickly reset aspirations. Critics note exceptions in very poor countries, yet the puzzle broadened research into social comparison, hedonic adaptation, and non-GDP welfare measures such as the Human Development Index.
64 Giffen Paradox
For most goods, higher price lowers quantity demanded, but the Irish potato famine and later Chinese rice studies documented “Giffen goods”—inferior staples that the poor bought more of when prices rose because costlier staples left even less income for pricier substitutes (meat). The upward-sloping demand segment appears where substitution and income effects run opposite directions and the negative income effect dominates, challenging simple applications of the law of demand.
65 Edgeworth (Tax-Tariff) Paradox
Francis Edgeworth and Vilfredo Pareto showed that under certain elasticities, a country cutting an import tariff could raise its terms of trade and welfare, yet if both trading partners attempt optimal tariffs, each can end worse off. The paradox illustrates that unilateral and bilateral tariff policies interact strategically; it underpins modern optimal-tariff theory and the case for multilateral trade agreements to escape mutual retaliation spirals.
66 Leontief Paradox
Heckscher-Ohlin predicts the capital-abundant United States should export capital-intensive goods, yet Wassily Leontief (1953) found the opposite: U.S. exports were labour-intensive relative to imports. Explanations invoke human-capital-embedded labour, trade barriers, and post-war data quirks. The paradox motivated new trade models incorporating technology differences (Ricardian-HO hybrids) and firm heterogeneity, highlighting that factor endowments alone cannot explain complex trade patterns.
67 Scitovsky Paradox (Reversals in Welfare Tests)
A policy may pass the Kaldor test (winners could hypothetically compensate losers) and the Hicks test (losers cannot bribe winners to prevent it) yet fail when the initial allocation is reversed, producing inconsistent welfare rankings. Tibor Scitovsky’s insight undermined one-dimensional potential-Pareto criteria and spurred adoption of compensation tests with a double-criterion or explicit distribution-weighted social welfare functions.
68 Diamond–Water Paradox
Why is water, essential to life, cheap, while diamonds, mere luxuries, are costly? Classical economists resolved the riddle by separating total utility from marginal utility: because water is abundant, its extra (marginal) unit brings little additional satisfaction, whereas diamonds are scarce, so each incremental carat commands a high price. The paradox thus clarifies how market prices reflect marginal, not absolute, usefulness.
69 Paradox of Competition
Tight cost control, advertising, or export drives can help a single firm, yet if every firm pursues the same strategy aggressively, aggregate demand or profits may shrink, leaving the industry worse off. This parallels the prisoner’s dilemma in markets and underlies arguments for antitrust leniency on certain cooperative behaviours (e.g., industry marketing boards) or macro-policy support when sectors face race-to-the-bottom pressures.
70 Paradox of Flexibility (Wage-Cut Paradox)
Classical theory says lower wages boost employment, but in a deflationary slump, widespread wage cuts reduce household income and spending, lowering demand and profits, and can deepen unemployment. Keynesian macro therefore warns that wage flexibility may exacerbate downturns and endorses nominal rigidities or coordinated demand-side stimulus to break the vicious cycle.
71 Productivity Paradox (Solow Paradox)
“I can see computers everywhere except in the productivity statistics,” quipped Robert Solow (1987) after massive IT investment failed to lift measured output per hour. Suggested explanations: mis-measurement (quality gains in services), lagged organisational changes, and redistributive rather than additive gains. Subsequent decades showed a late-1990s surge, then another slowdown, keeping the debate alive on whether digital tech diffuses unevenly or GDP metrics miss intangible value.
72 Paradox of Toil
More workers seeking jobs should expand output, but in a liquidity trap with sticky prices, an outward labour-supply shift can lower wages, reduce income, and shrink aggregate demand, causing total employment to fall. New Keynesian models emphasise demand-determined output; increasing willingness to work does not guarantee more jobs without matching spending.
73 Lucas Paradox (Capital Flow)
Neoclassical theory predicts capital should flow from rich to poor nations where returns are higher. In practice, net flows often reverse. Explanations cite institutional risk, weak property rights, human-capital complementarities, and asymmetric information. The paradox redirects development policy toward governance and financial deepening, not just physical-capital scarcity.
74 Moral-Hazard Paradox in Insurance
Buying insurance should raise risky behaviour, yet empirical studies sometimes find the insured act more cautiously (seat-belt laws with airbags reduced fatality risk per crash). Ex post audits, deductibles, and reputation effects can temper moral hazard; psychological comfort might even heighten risk awareness. The paradox reveals that incentive responses vary with context, challenging simple “more insurance, more risk” axioms.
75 Backward-Bending Labour-Supply Curve
At low wages, higher pay induces more hours; beyond a threshold, further wage hikes buy more leisure, reducing labour supplied. The individual supply curve bends backwards—yet aggregate labour supply rarely does, because heterogeneity smooths the kink. Understanding the paradox helps explain anomalies such as reduced overtime despite pay raises and informs optimal income-tax design.
76 Arrow’s Information Paradox
“To sell information, you must reveal it, but once revealed, it is free.” This non-excludability limits private markets for pure knowledge. Temporary intellectual-property rights, confidentiality contracts, and signal-display mechanisms (patent abstracts) arose as policy and institutional solutions to the paradox, balancing disclosure incentives with diffusion benefits.
77 Bernanke–Lucas “Great Moderation” Paradox
From the mid-1980s to 2007, macro volatility fell sharply. Optimists credited improved monetary policy—yet the subsequent 2008 crisis showed that apparent stability can breed complacency, excess leverage, and hidden fragility. The paradox echoes Minsky’s view that calm periods sow the seeds of future turmoil and urges regulators to monitor systemic risk, not just surface volatility.
78 Paradox of Prosperity
Boom times accelerate investment and optimism, but collective over-extension (excess debt, malinvestment) sets up a harsher bust. Policymakers debate counter-cyclical buffers—fiscal surpluses, macro-prudential capital charges—to discipline euphoria before it morphs into crisis. The paradox underlies “lean-against-the-wind” stances in central banking.
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