Destruction in Exchange Economies?

Question

I am reading about exchange economies and ran across something that is counter intuitive.How is it that in an exchange economy with no production that a person can make himself/herself better off by destroying a portion of his or her endowment? If there is no production how, in the long run, is a person better off destroying some of the available resource if that resource can't be replaced etc.? Can anyone illustrate this in a simple manner to help with the intuition? I know that if there could be some way that destroying a bit of a resource can drive up prices such that the remaining quantity is now more valuable than the original quantity at original prices. Is that what is happening here? If so, why and how?

Answer 1

If the Demand for the product is inelastic. Destroying some of the product will lead to a large increase in it's price. The impact will be to increase total revenues.

Here is a simple example.. You own the only gas station in town. Every body NEEDS to drive to work. If gas is cheap thjey go on family outings on the weekend. Supposse one of your storage tanks explodes and you lose 20% of your fule stocks and won't be able to replace it for some time Gasoline was 2.50/galloan. but there is now a shortage. At a price of $4 per gallon you can meet the demand for people getting to work. They don't take the weekend trips any more. You are selling 25% less gasoline but at a 60% higher price. You are making more money and everybody is staying home on weekends.

I hope this makes sense?

Best,

Lenny