Allocation Flashcards
What is allocation?
The outcome of an economic transaction
When is an allocation Pareto efficient?
When no party can be made better off without making another party worse off
When is an allocation unfair?
When there is a large gap between the gains of each party
When does an allocation Pareto dominate?
When no party can gain reward without lowering the reward of another party
Is Pareto efficiency related to fairness?
No, often Pareto efficient allocations are unfair
What does fairness do?
Evaluates the rules of the transaction and the outcome
What are the two reasons for which an allocation can be considered unfair?
Inequality of final outcome (substantive judgement)
How the outcome came about (procedural judgement)
What is Rawls’ veil of ignorance?
When the person evaluating the allocation takes an impartial perspective
How does Rawls’ veil of ignorance encourage fairness?
The person evaluating the outcome doesn’t know which party they will be a part of, so they create the best outcome for all parties
Though economics doesn’t provide judgement on fairness, what does it clarify?
How institutions affect inequality
Trade-offs in the fairness of an outcome
Which public policies can address unfairness and how they can do it
What is the utility maximising choice?
The allocation where the amount of goods one party is willing to trade for the other good (MRS) equals the actual trade-off between the two goods (MRT)
How does technological advancement affect the feasible frontier?
It moves it up, as it enables an increase in productivity
What does the combined feasible set show?
All possible allocations of production between two parties
What does the final chosen allocation depend on?
The institution and its policies
What does the feasible frontier show in terms of allocations?
All of the technically feasible outcomes
What does the biological survival constraint show?
All of the biologically feasible outcomes
Where are the feasible allocations found on a graph with a feasible frontier and a biological survival constraint?
The area between the feasible frontier and the biological survival contraint
What are two policies that can be used to agree on an allocation?
Coercion
Voluntary exchange
When is an allocation chosen by coercion?
When only one party holds the power, the allocation is imposed by force
What allocation is chosen when the policy choosing it is coercion?
The allocation that maximises the power-holder’s economic rent: where the slope of the biological survival constraint (MRS) equals the slope of the feasible frontier (MRT)
How is an allocation chosen by voluntary exchange?
When both parties hold bargaining power, the allocation must be chosen by bargaining
What two factors does an allocation decided through voluntary exchange depend on?
The relative bargaining power of each party
Each party’s reservation option (reservation indifference curve)
What is the economically feasible set?
The area on a graph between the reservation indifference curve and the feasible frontier
What does the economically feasible set show?
All possible allocations that benefit both parties
How is joint surplus maximised when choosing an allocation through voluntary exchange?
Where the slope of the reservation indifference curve equals the curve of the feasible frontier
What happens to the total surplus when an allocation is chosen through voluntary exchange?
Since both parties have to agree to the allocation, the total surplus is lower
