<p>Any market will always come to a Pareto optimum for that market. Free exchange will always do that. Pareto optimal states are states where no trade can make an actor better off without making the counterparty worse off. There are states where one actor gains more than another loses, but a market of utility-seeking actors will not cause that transfer to happen because all market transactions are consensual. As an example, neither monopolies and externalities prevent reaching a Pareto optimum, however they may prevent reaching a state more optimal than any Pareto optimum.</p>
<p>The question is not whether it will get to a Pareto optimum, but whether there are <a href="https://governology.substack.com/p/the-role-of-government-part-1" rel="nofollow noreferrer">more optimal states</a> than the Pareto frontier that can't be reached by the market rules.</p>
<p>In a gift economy, people give gifts and expect unspecified gifts in return in the future. What this mean is that it is an exchange, but one with high error bars. You might not know when or how much you'll be compensated, but you only participate because your expected value is positive. Much of this value comes from social ties, but the point still stands.</p>
<p>Therefore you should expect that a gift economy will be able to achieve approximately as optimal a state as a monetary economy. However, you should expect this process to take enormously longer because of the high degree of uncertainty and time lag that reduces the number of &quot;trades&quot; that will end up economically positive, and fogs the information necessary to optimize the efficiency of trades.</p>
<p>As a side note, gift economies are absolutely not the same as barter economies. You could think of them as barter where the goods in question are vague statistical expectations of what will be received in return, but this isn't really a standard way to think about it. In gift economies, people give gifts with the expectation of unspecified gifts in return while in a barter economy people decide what to trade up front. They are very clearly not the same.</p>

CC BY-SA 4.0
2023-08-31T19:22:02.510Z
There are several known textbook cases of a market allocation not being Pareto efficient. E.g.; 1. market power 2. externalities 3. asymmetric information. These are not special cases, most real world situations involve at least one of these. (-1)
Giskard
CC BY-SA 4.0
2023-08-31T19:25:30.087Z
Funnily enough, you yourself quote these in [an answer](https://economics.stackexchange.com/a/56235/1601) you wrote shortly before this one! Not sure why, in this case, you would write here that "*Any market will always come to a pareto optimum for that market. Free exchange will always do that..*"
Giskard
CC BY-SA 4.0
2023-10-03T03:17:20.007Z
If so, then they're using a different definintion of pareto efficient. Market power, for example, does not result in situations where any market actor refuses to make a trade that isn't good for them. Neither do externalities. That's what pareto efficiency is about. Externalities, for example, certainly cause inefficiency, but NOT pareto inefficiency.
B T
CC BY-SA 4.0
2023-10-03T09:51:06.707Z
"*Market power, for example, does not result in situations where any market actor refuses to make a trade that isn't good for them.*" To be clear, are you claiming that a market where the only supplier is a monopoly will result in a Pareto Efficient outcome if all agents act rationally? Just want to clarify this because I think this is a statement most students should be familiar with.
Giskard
CC BY-SA 4.0
2023-10-03T09:52:51.283Z
"*certainly cause inefficiency, but NOT pareto inefficiency.*" I would also be interested in what this other inefficiency is, what is it name, if it is not Pareto inefficiency?
Giskard
CC BY-SA 4.0
2023-10-05T19:16:13.320Z
"a market where the only supplier is a monopoly will result in a Pareto Efficient outcome" - Yes. Pareto optimal states are states where no actor can be made better off without making another actor worse off. There are states where one actor gains more than another loses, but a market of utility-seeking actors will not cause that transfer to happen because all market transactions are consensual.
B T
CC BY-SA 4.0
2023-10-06T06:59:08.557Z
Would you mind editing the quoted claim into your answer? I think this would help people who know the subject decide if they want to up or downvote it.
Giskard
CC BY-SA 4.0
2023-10-18T03:13:49.960Z
I've added my comment clarification into my answer. Does that address what you wanted?
B T
CC BY-SA 4.0
2023-10-18T05:19:08.227Z
Sorry, but no. I would like you to include your claim "*a market where the only supplier is a monopoly will result in a Pareto Efficient outcome*" in your answer. This is very easy to interpret for people just glancing at the answer.
Giskard
CC BY-SA 4.0
2023-10-18T07:03:11.957Z
The statement that externalities do not cause Pareto inefficiencies would do, too. It is perfectly fine not to answer a question if one has no idea how to answer it.
Michael Greinecker
CC BY-SA 4.0
2023-10-19T18:02:45.473Z
I've attemtped more clarification
B T
CC BY-SA 4.0
2023-08-31T15:18:59.103Z
2023-10-22T11:20:43.700Z
2023-10-22T11:20:43.700Z
B T
<p>A gift economy is a system of exchange characterised by delayed exchange on the basis of the principle of reciprocity. I.e. where a market seeks to exchange goods in immediate transactions without further obligations, in a gift economy goods are &quot;gifted&quot; with the social expectation of reciprocation at a specified or unspecified time in the future. Failure to reciprocate adequately results in lower social prestige, and vice versa with reciprocating even more than what was received.</p>
<p>Interestingly, this is the mode of exchange that dominated most of human history, in particular prior to the agricultural revolution.</p>
<p>Even more interestingly, case studies with the &quot;moka exchange&quot; system in the highlands of Papua New Guinea have shown that gift economies suffer from boom-bust debt cycles, just like market economies.</p>
<p>This has led me to wonder, do gift economies tend towards Pareto efficiency as is characteristic of market economies with efficient supply, demand and exchange, and if yes, are the prerequisites for such Pareto efficiency different in gift economies?</p>
<p>The only studies I could find that remotely attempt to answer the question unfortunately primarily dealt with altruistic &quot;pure gifts&quot;, not &quot;reciprocal gifts&quot;.</p>

CC BY-SA 4.0
2021-12-03T13:49:48.423Z
What is the difference between a 'reciprocal gift' and an exchange? This is a rhetorical question trying to point out that if you define 'reciprocal gift' in terms of the utility of agents it is hard to see how what you are talking about is any different from a simple exchange economy. A gift is not really a gift if you are supposed to 'pay'/'reciprotate' with something of equal value.
Jesper Hybel
CC BY-SA 4.0
2021-12-03T14:07:49.787Z
Can you please support your claim that "*market economies with efficient supply, demand and exchange*" "*tend towards Pareto efficiency*" in practice, as you seem to imply? Or explain what you mean by this, since this seems to be a very theoretical concept?
Giskard
CC BY-SA 4.0
2021-12-03T14:19:09.220Z
What you call gift economy would in most economics be considered barter economy. Barter is just exchange with absence of money. Gift economy is just name social anthropologist give to what economists understand as barter, because in social anthropology barter involves immediate exchange of two goods (the terminology is often different between different fields). Consequently, in economics you should try to search literature for barter (This is why you could only find studies that deal with pure gifts not reciprocal gifts, in econ if you are expected to pay back for a gift you are bartering).
1muflon1
CC BY-SA 4.0
2021-12-04T12:13:45.583Z
@JesperHybel The reason it's hard to characterize these so-called "gifts" as mere exchanges is because reciprocation is not mandatory, and the thing being exchanged back is not necessarily agreed upon beforehand. Lack of full reciprocation impacts social status (and inversely over-reciprocation raises your social status), but gift economies appear to fundamentally be about the relationship between two people, rather than the goods themselves, as in a market.
Vlad
CC BY-SA 4.0
2021-12-04T12:15:09.823Z
@Giskard I've been told that those three things are the preconditions for a market that is Pareto efficient. Have I misunderstood something?
Vlad
CC BY-SA 4.0
2021-12-04T12:21:48.753Z
@1muflon1 Like I attempted to expand upon to another commenter, whereas markets, whether mediated through currency or barter, focus on the goods themselves and their value, gift economies focus on establishing and maintaining a relationship towards other actors and/or groups. A mundane example that applies to the modern day would be something like helping me with something, and then me helping you another day. This is not trivial to characterize as barter, as you're not coming to me and saying "if I do X, will you do Y?", but rather consists of you offering your labour without demanding any
Vlad
CC BY-SA 4.0
2021-12-04T12:25:50.053Z
explicit obligations, but nevertheless seeding the idea in both of our minds that if I help you another day or give you something you might value, we may continue the relationship we've established. In this way, in societies that are pure gift economies, everything happens through persuasion rather than depending on property rights, which also leads to inequality when entire tribes "owe" reciprocation towards a few individuals, who are then able to control everyone else through sheer social obligation, rather than coercion as in state societies.
Vlad
CC BY-SA 4.0
2021-12-04T13:19:07.727Z
@Vlad what I am saying is that in econ we do not make the destinction that sociologists do. For social anthropologist there is difference in economics there isn’t. Different field = different terminology. Would you be surprised if I told you inflation has different meaning in medicine, cosmology and economics? In economics even if you are establishing social relationships you are doing barter. This is because in economics there isn’t any distinction made between exchanges that form social relationships and ones that don’t. From econ perspective both are barter
1muflon1
CC BY-SA 4.0
2021-12-04T13:47:29.647Z
@1muflon1 That's really interesting. So you're saying that gift economies are just systems of barter without any of the disadvantages typically associated with barter, and with a form of debt? Wikipedia says that "Economists [not Anthropologists] distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not one delayed in time.", but this statement appears to be completely uncited.
Vlad
CC BY-SA 4.0
2021-12-04T14:03:35.860Z
@Vlad then this is the case when wikipedia is not correct or maybe there are some multidisciplinary fields that follow the social anthropology definition but general econ does not make the distinction. 1. there are multiple barter models where exchange is delayed. In fact about 70% of micro is just barter since money are unimportant for micro problems so we typically abstract away from having money. 2. In econ barter has the following definition: "Barter, as distinct from exchange, is defined by the absence of money both as a medium of exchange and a measure of value." (Edgeworth, 2016)
1muflon1
CC BY-SA 4.0
2021-12-04T14:06:19.407Z
as you see in econ barter is characterized by exchanges in absence of money. That is it, as long as you are exchanging you are not giving gifts in any meaningful  **economic sense**. Of course, I am not trying to say that sociology is wrong, different fields have different needs, in physics no distinction between live and dead matter is made, in biology people distinguish between that. When it comes to economics there is no meaningful difference between exchanging goods without money and forming social bond and exchanging the same goods without money and not forming social bonds.
1muflon1
CC BY-SA 4.0
2021-12-04T14:09:21.617Z
however, if you want to learn from a different field you have to learn their terminology. If you wanna learn physics you have to learn that in physics inflation refers to expansion of cosmos. Otherwise you will be using wrong keywords in your literature search. In your case I would strongly advise you to search with keywords of barter, because economically there is no meaningful difference between village where people exchange stuff without money and form some social bonds and one where they aren't. At best economics would consider those social bonds private contract enforcement mechanisms
1muflon1
CC BY-SA 4.0
2021-12-04T14:15:23.393Z
@Vlad I think this answer I made about a half a year ago at Skeptics might clear things up for you https://skeptics.stackexchange.com/a/51986/58856 (I discuss there differences between sociology & econ view of barter - you can just look at barter section and skip the rest)
1muflon1
<pareto-efficiency><efficient-markets>
Do non-market gift economies tend towards Pareto optimality?
Vlad
# Do non-market gift economies tend towards Pareto optimality?

(Asked by: username_0 on 2021-12-03)

A gift economy is a system of exchange characterised by delayed exchange on the basis of the principle of reciprocity. I.e. where a market seeks to exchange goods in immediate transactions without further obligations, in a gift economy goods are "gifted" with the social expectation of reciprocation at a specified or unspecified time in the future. Failure to reciprocate adequately results in lower social prestige, and vice versa with reciprocating even more than what was received.

Interestingly, this is the mode of exchange that dominated most of human history, in particular prior to the agricultural revolution.

Even more interestingly, case studies with the "moka exchange" system in the highlands of Papua New Guinea have shown that gift economies suffer from boom-bust debt cycles, just like market economies.

This has led me to wonder, do gift economies tend towards Pareto efficiency as is characteristic of market economies with efficient supply, demand and exchange, and if yes, are the prerequisites for such Pareto efficiency different in gift economies?

The only studies I could find that remotely attempt to answer the question unfortunately primarily dealt with altruistic "pure gifts", not "reciprocal gifts".

**Tags:** pareto-efficiency, efficient-markets

> **Comments:**
> **username_1**: What is the difference between a 'reciprocal gift' and an exchange? This is a rhetorical question trying to point out that if you define 'reciprocal gift' in terms of the utility of agents it is hard to see how what you are talking about is any different from a simple exchange economy. A gift is not really a gift if you are supposed to 'pay'/'reciprotate' with something of equal value.  
> **username_2**: Can you please support your claim that "*market economies with efficient supply, demand and exchange*" "*tend towards Pareto efficiency*" in practice, as you seem to imply? Or explain what you mean by this, since this seems to be a very theoretical concept?  
> **username_3**: What you call gift economy would in most economics be considered barter economy. Barter is just exchange with absence of money. Gift economy is just name social anthropologist give to what economists understand as barter, because in social anthropology barter involves immediate exchange of two goods (the terminology is often different between different fields). Consequently, in economics you should try to search literature for barter (This is why you could only find studies that deal with pure gifts not reciprocal gifts, in econ if you are expected to pay back for a gift you are bartering).  
> **username_0**: @JesperHybel The reason it's hard to characterize these so-called "gifts" as mere exchanges is because reciprocation is not mandatory, and the thing being exchanged back is not necessarily agreed upon beforehand. Lack of full reciprocation impacts social status (and inversely over-reciprocation raises your social status), but gift economies appear to fundamentally be about the relationship between two people, rather than the goods themselves, as in a market.  
> **username_0**: @username_2 I've been told that those three things are the preconditions for a market that is Pareto efficient. Have I misunderstood something?  
> **username_0**: @username_3 Like I attempted to expand upon to another commenter, whereas markets, whether mediated through currency or barter, focus on the goods themselves and their value, gift economies focus on establishing and maintaining a relationship towards other actors and/or groups. A mundane example that applies to the modern day would be something like helping me with something, and then me helping you another day. This is not trivial to characterize as barter, as you're not coming to me and saying "if I do X, will you do Y?", but rather consists of you offering your labour without demanding any  
> **username_0**: explicit obligations, but nevertheless seeding the idea in both of our minds that if I help you another day or give you something you might value, we may continue the relationship we've established. In this way, in societies that are pure gift economies, everything happens through persuasion rather than depending on property rights, which also leads to inequality when entire tribes "owe" reciprocation towards a few individuals, who are then able to control everyone else through sheer social obligation, rather than coercion as in state societies.  
> **username_3**: @username_0 what I am saying is that in econ we do not make the destinction that sociologists do. For social anthropologist there is difference in economics there isn’t. Different field = different terminology. Would you be surprised if I told you inflation has different meaning in medicine, cosmology and economics? In economics even if you are establishing social relationships you are doing barter. This is because in economics there isn’t any distinction made between exchanges that form social relationships and ones that don’t. From econ perspective both are barter  
> **username_0**: @username_3 That's really interesting. So you're saying that gift economies are just systems of barter without any of the disadvantages typically associated with barter, and with a form of debt? Wikipedia says that "Economists [not Anthropologists] distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not one delayed in time.", but this statement appears to be completely uncited.  
> **username_3**: @username_0 then this is the case when wikipedia is not correct or maybe there are some multidisciplinary fields that follow the social anthropology definition but general econ does not make the distinction. 1. there are multiple barter models where exchange is delayed. In fact about 70% of micro is just barter since money are unimportant for micro problems so we typically abstract away from having money. 2. In econ barter has the following definition: "Barter, as distinct from exchange, is defined by the absence of money both as a medium of exchange and a measure of value." (Edgeworth, 2016)  
> **username_3**: as you see in econ barter is characterized by exchanges in absence of money. That is it, as long as you are exchanging you are not giving gifts in any meaningful  **economic sense**. Of course, I am not trying to say that sociology is wrong, different fields have different needs, in physics no distinction between live and dead matter is made, in biology people distinguish between that. When it comes to economics there is no meaningful difference between exchanging goods without money and forming social bond and exchanging the same goods without money and not forming social bonds.  
> **username_3**: however, if you want to learn from a different field you have to learn their terminology. If you wanna learn physics you have to learn that in physics inflation refers to expansion of cosmos. Otherwise you will be using wrong keywords in your literature search. In your case I would strongly advise you to search with keywords of barter, because economically there is no meaningful difference between village where people exchange stuff without money and form some social bonds and one where they aren't. At best economics would consider those social bonds private contract enforcement mechanisms  
> **username_3**: @username_0 I think this answer I made about a half a year ago at Skeptics might clear things up for you https://skeptics.stackexchange.com/a/51986/58856 (I discuss there differences between sociology & econ view of barter - you can just look at barter section and skip the rest)  

---

## 1 answers

### Answer by username_4 on 2023-08-31. Score: 0

Any market will always come to a Pareto optimum for that market. Free exchange will always do that. Pareto optimal states are states where no trade can make an actor better off without making the counterparty worse off. There are states where one actor gains more than another loses, but a market of utility-seeking actors will not cause that transfer to happen because all market transactions are consensual. As an example, neither monopolies and externalities prevent reaching a Pareto optimum, however they may prevent reaching a state more optimal than any Pareto optimum.

The question is not whether it will get to a Pareto optimum, but whether there are [more optimal states](https://governology.substack.com/p/the-role-of-government-part-1) than the Pareto frontier that can't be reached by the market rules.

In a gift economy, people give gifts and expect unspecified gifts in return in the future. What this mean is that it is an exchange, but one with high error bars. You might not know when or how much you'll be compensated, but you only participate because your expected value is positive. Much of this value comes from social ties, but the point still stands.

Therefore you should expect that a gift economy will be able to achieve approximately as optimal a state as a monetary economy. However, you should expect this process to take enormously longer because of the high degree of uncertainty and time lag that reduces the number of "trades" that will end up economically positive, and fogs the information necessary to optimize the efficiency of trades.

As a side note, gift economies are absolutely not the same as barter economies. You could think of them as barter where the goods in question are vague statistical expectations of what will be received in return, but this isn't really a standard way to think about it. In gift economies, people give gifts with the expectation of unspecified gifts in return while in a barter economy people decide what to trade up front. They are very clearly not the same.

> **Comments:**
> **username_2**: There are several known textbook cases of a market allocation not being Pareto efficient. E.g.; 1. market power 2. externalities 3. asymmetric information. These are not special cases, most real world situations involve at least one of these. (-1)  
> **username_2**: Funnily enough, you yourself quote these in [an answer](https://economics.stackexchange.com/a/56235/1601) you wrote shortly before this one! Not sure why, in this case, you would write here that "*Any market will always come to a pareto optimum for that market. Free exchange will always do that..*"  
> **username_4**: If so, then they're using a different definintion of pareto efficient. Market power, for example, does not result in situations where any market actor refuses to make a trade that isn't good for them. Neither do externalities. That's what pareto efficiency is about. Externalities, for example, certainly cause inefficiency, but NOT pareto inefficiency.  
> **username_2**: "*Market power, for example, does not result in situations where any market actor refuses to make a trade that isn't good for them.*" To be clear, are you claiming that a market where the only supplier is a monopoly will result in a Pareto Efficient outcome if all agents act rationally? Just want to clarify this because I think this is a statement most students should be familiar with.  
> **username_2**: "*certainly cause inefficiency, but NOT pareto inefficiency.*" I would also be interested in what this other inefficiency is, what is it name, if it is not Pareto inefficiency?  
> **username_4**: "a market where the only supplier is a monopoly will result in a Pareto Efficient outcome" - Yes. Pareto optimal states are states where no actor can be made better off without making another actor worse off. There are states where one actor gains more than another loses, but a market of utility-seeking actors will not cause that transfer to happen because all market transactions are consensual.  
> **username_2**: Would you mind editing the quoted claim into your answer? I think this would help people who know the subject decide if they want to up or downvote it.  
> **username_4**: I've added my comment clarification into my answer. Does that address what you wanted?  
> **username_2**: Sorry, but no. I would like you to include your claim "*a market where the only supplier is a monopoly will result in a Pareto Efficient outcome*" in your answer. This is very easy to interpret for people just glancing at the answer.  
> **username_5**: The statement that externalities do not cause Pareto inefficiencies would do, too. It is perfectly fine not to answer a question if one has no idea how to answer it.  
> **username_4**: I've attemtped more clarification  

---

