Unit 5 - Property and Power: Mutual Gains and Conflict

Question 1

The Pareto criterion

Answer 1

• The allocation of resources under which at least one party would be better off than before, with no party being worse off than before

Question 2

Pareto efficient allocation

Answer 2

• An allocation that is not Pareto dominated by any other allocation - there is no alternative allocation in which at least one party would be better off and nobody worse off

Question 3

Limitations of Pareto Efficiency

Answer 3

• There are often more than one Pareto efficient allocations
• Pareto efficiency is unrelated to fairness

Question 4

Types of judgments on the fairness of allocations

Answer 4

• Substantive judgments
• Procedural judgments

Question 5

Substantive judgments - based on inequality in one of these aspects of the allocation:

Answer 5

• income
• happiness
• freedom

Question 6

Procedural judgments

Answer 6

• Voluntary exchange of private property acquired by legitimate means
• Equal opportunity for economic advantage
• Deservingness

Question 7

Technically feasible set

Answer 7

• Shown by the feasible frontier - all of the technically feasible outcomes, limited by technology

Question 8

Biological survival constraint

Answer 8

• Shows all the biologically feasible outcomes, limited by survival

Question 9

Economic rent

Answer 9

= the amount one earns over the amount one earns if one did not gave certain productive advancements

*sum of economic rents - joint surplus

Question 10

Reservation option

Answer 10

• A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (working)
• Reservation IC - all the combinations that provide the same utility as the reservation option (not working and receiving unemployment benefits for example)

Question 11

Economically feasible set

Answer 11

• Area between reservation IC and PPC - within the area determined by the technically feasible set and the biological constraint
• The economically feasible set consists of allocations with mutual gains - Pareto improvement

Question 12

Pareto efficiency curve

Answer 12

All of the allocations on the curve are pareto-efficient - there is no alternative technically feasible allocation in which at leaste one person would be better off, and no one worse off
- on the curve - all points MRS = MRT (optimality condition)

Question 13

What determines allocations in society?

Answer 13

• Institutions
• Property rights
• Bargaining power

Question 14

Lorenz curve

Answer 14

• Indicates how much disparity there is in income across the population
• It allows us to see how far a distribution departs from the line of perfect equality

Question 15

Gini Coefficient

Answer 15

• calculates as A/A+B - area between lorenz curve and perfect equality line / area of the triangle
• Gini = 0 - perfect equality
• Gini = 1 - perfect inequality

Question 16

Disposable income vs market income

Answer 16

The Gini coefficient for disposable income is lower than for market income
- because of governmental policies to reduce income inequality