Exchange Theory using Edgeworth box

1
A binding usury law lowers the interest rate.
At the lower interest rate, students would like
to move from point Y to point N.
At the lower interest rate the elderly want to
move from point Y to point M.
Usury Outcome
Usury Price
Initial Market Price
Since the elderly want to trade less than
students, the outcome of the usury law will be
the movement from point Y to point M.
Free trade outcome
2
Usury Laws and Well-Being
As we just saw, at the usury price, the market
will be constrained by how much the type B
consumers want to trade
In the example shown to the right, the movement
from the free trade outcome to the usury outcome
means that Bs are worse off, As are better off,
and we are no longer at a point of Pareto
optimality.
Usury Outcome
Usury Price
Initial Market Price
Free trade outcome