Efficient Allocations, Equilibria and Stability in Scarf's Economy

Scarf's economy has been a vehicle in understanding stability properties in exchange economies. The full set of market equilibria and Pareto optimal allocations for this economy has not been analysed. This paper aims to do that. Firstly, we examine the Pareto optima and we find three different classes. Only Class I exhausts the aggregate endowments of all the goods. Class II and III involve throwing away partially or totally one good in order to achieve Pareto efficiency. Secondly, we explore the price and endowment distribution combinations which sustain the different Pareto Optima as market equilibria. A Pareto optimum which involves throwing away the whole endowment of one of the goods is globally stable.