Chapter 5 Flashcards
What is Pareto efficiency?
An allocation can be Pareto efficient if no one can be better off without making someone worse off
When is something Pareto dominant?
When all players would prefer some other outcome
Are Pareto efficient outcomes always fair?
No, eg is you offer to give someone 1p of your £100 and their other option is nothing that would be unfair but Pareto efficient
Why would an allocation be considered unfair?
Inequality of final outcome (substantive judgement of fairness)
How they came about (procedural judgement of fairness)
What is Rawls’ veil of ignorance?
Adopt the principal that fairness applies to all people
Imagine veil of ignorance
From behind the veil, we can make a judgement
Economics can’t provide judgement but what can it clarify?
How institutions affect inequality (rules of the game)
Trade offs in the fairness of outcomes
Which public policies can address the unfairness and how
What outcomes does the feasible frontier show?
It shows all the technically feasible outcomes (limited be technology)
What is the biological constraint.
It shows all the biologically feasible outcomes (limited by survival eg people need sleep and food so can’t work all day every day)
Where are the feasible allocations?
It is given by the intersection of the technically feasible set and the biological constraint
What is coercion?
Imposing allocations by force (eg can’t choose work hours)
At what point is economic rent maximised under coercion?
Where the slope of the biological constraint equals the slope of the feasible frontier
Eg where the difference between needs and production are greatest
MRS=MRT
Define bargaining power
Relative bargaining power determines how much party a needs to pay the land owner from their surplus
Define reservation options
What they could get if they don’t agree to a deal
What would the set be called if it showed all possible allocations that benefit both parties?
The economically feasible set
What is the economically feasible set defined by?
Person A’s reservation indifference curve
At what point would joint surplus be maximised if not under coercion?
Where the slope of the reservation indifference curve equals that of then feasible frontier
Is the surplus higher under coercion or bargaining?
Coercion
Define quasi-linear preferences
The indifference curves have the same slope as you move up the vertical line of the x-axis
The amount of units of the y-axis doesn’t change the preference to the x-axis (only one is preferable)
What is the Pareto efficient curve?
The set of all Pareto efficient allocations. It joins together all points where MRS=MRT
Joint surplus is the same but the distribution of the surplus differs at each point on curve
What two factors can affect the size and distribution of the surplus?
Institutions and policies
Who gains more bargaining power if laws that limit working hours are introduced?
The workers
What factors determine which allocations are technically feasible?
Technology and biology
What factors determine which allocations are economically feasible?
Institutions and policies
What does the Lorenz curve show?
The extent of inequality and allows comparison of distribution
What does the Gini coefficient do?
Is a measure of inequality, approximated as the deviation of the Lorenz curve from the perfect equality line
What range does inequality have?
0 (perfectly equality) to 1 (maximum inequality)
How do governments address inequality?
Redistributive government policies (income tax and transfers) help in a more equal distributions of disposable income
