The other day I was having a debate with a supporter of high taxes. I decided to argue against this by explaining the concept of the deadweight loss of taxation. In order to do so, I started with the following example, to explain the deadweight gain of trade:

Bob and Sam live next door. Bob can mow his lawn in 4 hours, and clean his gutters in 2 hours. Sam is the other way around: He can mow his lawn in 2 hours and clean his gutters in 4. If Bob cleans Sams gutters in exchange for Sam mowing his lawn, they both save 2 hours.

My friend replied: "I understand the mathematics, and don't dispute that in your example both people would be better off. But is there any evidence that this works in the real world? Perhaps there is some unforeseen factor that causes voluntary exchange to not be mutually beneficial."

This question left me momentarily stumped, because I had always found the concept self evident and did not have any obvious examples at hand.

Improvising, I tried using the example of China and the USA both benefiting from trading with each other (my thinking was that this was a more contemporary form of Ricardo's original wheat example). However this caused my friend to object on grounds of geopolitical issues. So I am hoping to find a better example, that does not raise other issues.

Therefore I wanted to ask: Can anyone suggest some unambiguous, real world (ie non-hypothetical) evidence of the mutual benefits of voluntary exchange? If this could relate to exchange between individuals rather than countries I believe this would make the case more clearly.

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    $\begingroup$ Employment (time for money) and retail purchasing (money for goods) are commonplace examples. $\endgroup$ – H2ONaCl Sep 16 '19 at 7:44
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    $\begingroup$ I buy an apple from a farmer. Since I voluntarily entered into this exchange, it must be that I benefit. Same for the farmer. So, this voluntary exchange is mutually beneficial. (More generally, every voluntary exchange is necessarily mutually beneficial--with the caveat that both parties are well-informed.) $\endgroup$ – user18 Sep 16 '19 at 8:15
  • $\begingroup$ Taxes help people internalize negative externalities (like the answer below). They also serve the purpose of income/wealth redistribution. $\endgroup$ – Art Sep 16 '19 at 8:38
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    $\begingroup$ This by the way is one of the simplest, but also most profound and important insights from economics. That this question would have to be posed reflects the failure of teachers of economics, who probably think this too simple a point and fail to appreciate the need to emphasize it sufficiently. $\endgroup$ – user18 Sep 16 '19 at 9:58
  • $\begingroup$ Thanks all for your replies to my question :) $\endgroup$ – Appguy1 Sep 18 '19 at 1:24

First of all, there is no need to believe any economic dogma. The real world is usually more complicated than these stories. If anyone can convince me of something with a two minute anecdote, that was probably not an important aspect of my world view, and I should probably not engage in setting such policy. (E.g. via voting for the person who tells the same anecdote.)

The statement that voluntary exchange is mutually beneficial relies on the assumption that both parties are rational and well-informed. If the exchange was not mutually beneficial, the one who is losing via the exchange would just say "no, thank you". Hence literally all voluntary exchange is mutually beneficial (so long as the parties are rational and well-informed). This does not mean that the situation voluntary exchange leads to is optimal, just that it is better than having no market at all.

Some further remarks on taxation:

Deadweight loss is indeed bad. (By the way what you are describing is comparative advantage, not deadweight gain, as you yourself noted correctly in the tags.) However taxation is not the only thing that can cause market failure, which is when the free market leads to a suboptimal outcome. For example market power (monopoly, oligopoly, monopsony, etc.) may also result in deadweight loss.

Unregulated externalities (e.g. pollution) may cause harm, and in this case taxation (or a proper market for the externalities) can actually improve everyone's situation.

Underfinanced public goods (e.g. roads) may also mean market failure. Voluntary financing usually leads to underfinancing, hence taxes (or some revenue mechanism) are needed.

So taxation, while it does have downsides, is not the devil. It may do more harm than good and it may do more good than harm, it all boils down to the details.

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    $\begingroup$ Thank you for your time to answer my question :) $\endgroup$ – Appguy1 Sep 18 '19 at 1:24

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