institutions Flashcards
why care about institutions?
- incentives
- distribution of wealth
- bargaining power
production with no interference
where the feasibility frontier meets an indifference curve (ideal world)
production under absolute power (coercion)
worker is on a biological survival constraint- below the line- you aren’t efficient
top of the red line- impossible we have certain abilities
what mix of hours makes sense under absolute power?
we choose the middle one because you make the most profit. (MRS= MRT)
let’s consider property rights- you can say no - addition to biological constraint we have…
reservation wage (Z) (the line went up) - economic feasible frontier has shrunk (the landlord will offer MRS=MRT)
economic rent
a payment or other benefit beyond what the individual would have received in their next best alternative
joint surplus
the sum of all the economic rents of all involved in the interaction (between the red and blue lines)
pareto efficient
both sides do better (between the blue and red line is pareto efficient)
when we add labor laws
your’e getting more of the surplus- you work less and get more money. BUT amount of joint surplus is late. society is producing less- distribution is fair but production is less -
how can we increase economic growth under labor rights?
they can bargain for how much beyond the govt regulations. - worker has a new reservation point
deadweight loss
a loss of total surplus relative to a pareto efficient allocation
pareto efficient
the situation in which one doesn’t do worst when the other does better - doesn’t equate to fairness.
the lorenz curve
% percent has % wealth straight line is perfect equality
what does gini coefficient look at?
inequality across countries
gini coefficient formula
inequality gap (up area) / inequality gap + actual income distribution (larger inequality larger up area)
