Abstract:
We offer a simple proof of the paradox discovered by Stahl and Alexeev that the
introduction of black markets in a fixed price economy with a rationing mechanism
consisting of waiting line queues is not necessarily a Pareto improvement. We show
that the paradoxical result arises from the fact that queue length is endogenous and
illustrates the general principle that permitting an additional market may be
undesirable in an economy which has other distortions.
