The DM could have planned this as a test of faith for the paladin and if he had stood his ground gave him a huge reward or enlightenment have occurred. IMO the deity the paladin aligns with should have a “Come to (insert deity name here) moment” kind of a “Oh ye is little faith” sermon persay.
I agree with the fact that the dragon could win the fight in seconds. Bear in mind that a paladin is supposed to be one to preserve life not sacrifice it. I mean if I were to demand a granola bar from someone and they instead offer to buy me a steak dinner why in my right mind would I insist on...
A paladin would traditionally have an almost insane Charisma surely he could reason with a draconic being and offer a greater meal then that he would gain from any two humans unless they were immensely obese.