Chapter 5

Question 1

What is Pareto efficiency?

Answer 1

An allocation can be Pareto efficient if no one can be better off without making someone worse off

Question 2

When is something Pareto dominant?

Answer 2

When all players would prefer some other outcome

Question 3

Are Pareto efficient outcomes always fair?

Answer 3

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

Question 4

Why would an allocation be considered unfair?

Answer 4

Inequality of final outcome (substantive judgement of fairness)

How they came about (procedural judgement of fairness)

Question 5

What is Rawls’ veil of ignorance?

Answer 5

Adopt the principal that fairness applies to all people
Imagine veil of ignorance
From behind the veil, we can make a judgement

Question 6

Economics can’t provide judgement but what can it clarify?

Answer 6

How institutions affect inequality (rules of the game)
Trade offs in the fairness of outcomes
Which public policies can address the unfairness and how

Question 7

What outcomes does the feasible frontier show?

Answer 7

It shows all the technically feasible outcomes (limited be technology)

Question 8

What is the biological constraint.

Answer 8

It shows all the biologically feasible outcomes (limited by survival eg people need sleep and food so can’t work all day every day)

Question 9

Where are the feasible allocations?

Answer 9

It is given by the intersection of the technically feasible set and the biological constraint

Question 10

What is coercion?

Answer 10

Imposing allocations by force (eg can’t choose work hours)

Question 11

At what point is economic rent maximised under coercion?

Answer 11

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

Question 12

Define bargaining power

Answer 12

Relative bargaining power determines how much party a needs to pay the land owner from their surplus

Question 13

Define reservation options

Answer 13

What they could get if they don’t agree to a deal

Question 14

What would the set be called if it showed all possible allocations that benefit both parties?

Answer 14

The economically feasible set

Question 15

What is the economically feasible set defined by?

Answer 15

Person A’s reservation indifference curve

Question 16

At what point would joint surplus be maximised if not under coercion?

Answer 16

Where the slope of the reservation indifference curve equals that of then feasible frontier

Question 17

Is the surplus higher under coercion or bargaining?

Answer 17

Coercion

Question 18

Define quasi-linear preferences

Answer 18

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)

Question 19

What is the Pareto efficient curve?

Answer 19

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

Question 20

What two factors can affect the size and distribution of the surplus?

Answer 20

Institutions and policies

Question 21

Who gains more bargaining power if laws that limit working hours are introduced?

Answer 21

The workers

Question 22

What factors determine which allocations are technically feasible?

Answer 22

Technology and biology

Question 23

What factors determine which allocations are economically feasible?

Answer 23

Institutions and policies

Question 24

What does the Lorenz curve show?

Answer 24

The extent of inequality and allows comparison of distribution

Question 25

What does the Gini coefficient do?

Answer 25

Is a measure of inequality, approximated as the deviation of the Lorenz curve from the perfect equality line

Question 26

What range does inequality have?

Answer 26

0 (perfectly equality) to 1 (maximum inequality)

Question 27

How do governments address inequality?

Answer 27

Redistributive government policies (income tax and transfers) help in a more equal distributions of disposable income