Braess's paradox shows that in some cases, adding roads can make everyone's commute longer. (Pause here if you want to figure out on your own how that might be possible. The general situation is that everyone just tries to find the route that's quickest for them personally; and some roads take longer the more cars are on them.)
Roughly, an example of the paradox is as follows: everyone wants to get from one place to another place. There are two routes: road B followed by road B', and road C followed by road C'. Roads B and C' take a long time, which doesn't depend much on how many cars are there. Roads B' and C take a short time, given the current number of cars, but they take signficantly longer the more cars are there. Now, say you add a road D which is very short and connects the end of C to the beginning of B'. Since C, D, and B' take a short time, lots more cars take the new route C-D-B' rather than the old B-B' or C-C'. For some traffic-to-drive-time curves, the equilibrium of this ends up being that *everyone's* drive takes longer than before D was opened. (See wikipedia for details.)
What's even going on? We can rephrase the situation like this: each driver is presented with a choice. They can either take their old route, or they can take the new C-D-B' route, which is faster than their old route but causes everyone else a slightly longer drive. (I think for some settings of the numbers, this would be a sort of many-player Prisoner's Dilemma.) We could say, there's an unpriced externality of driving on C or B': you clog up the roads. If everyone disregards the externality, everyone ends up worse off.
This all seems like it should happen in lots of different contexts. Really, anything with lots of agents taking multiple pathways, some of which induce externalities. Wikipedia gives some examples, but doesn't give examples of this occurring in economic markets. So my question: are there examples of Braess's paradox in markets? In other words, are the examples where introducing a new good/service could make things broadly worse because of externalities from "overloading pathways"? Are there really big examples or ubiquitous classes of examples?
I'm not sure it's joint-carving to talk about Braess's paradox as separate from just externalities. The thing I have in mind is something like, specifically the externalities from raising the price on a good/service with an inelastic supply. In other words, we have the same situation sketched above, except now we have goods B and C' which are expensive but have an elastic supply (the production is expensive but can be extended to match demand); goods B' and C are cheap, but have a very inelastic supply (perhaps they rely on a fixed resource like a rare material or specialized knowledge, which at the moment is enough to meet demand); and many people very much want something you can get either by having B and B', or by having C and C'. Then, someone introduces good D, which is very cheap and supply-elastic, such that you can satisfy the same want by having B', C, and D. The inelastic supply is maxed out, and the price for B' and C skyrockets, leaving everyone worse off. Does this specific thing happen a lot? How elastic is supply, in general (a ridiculously broad and vague question, but still)?
Thanks. I was hoping to get real-world examples, but yeah this is interesting and does seem structurally similar. Though, an auction sort of seems like it's structurally assuming "total inelasticity", like there's just a fixed pile of goods that you're auctioning off (and then external to that we can compare two auctions with different goods), contrasting to markets, which I imagine are mostly at least somewhat supply-elastic (though maybe that's a wrong imagination, and certainly on shorter time-scales there's lots of supply inelasticity). I can't immedia... (read more)