i) Institutions:
Written and unwritten rules that govern interactions among people, including the
distribution of the products (output) of their joint effort.
Example: Labour law protecting workers rights
ii) Pareto efficient and Pareto inefficient:
Pareto efficient outcome is one where there is no possible alternative allocation in
which at least one person would be better off, and no person worse off.
iii) Are Pareto efficient allocations fair? Explain.
Pareto efficient outcomes can be fair, but they are not necessarily fair.
Example: an allocation where one person has all the cake, and the other person has
none is pareto efficient is pareto efficient but arguably not fair.
iv) Economic rents
A payment or benefit received over and above what the individual would have
received in his or her next best alternative (or reservation option).
Example: I have a job paying R100/hour and my next best alternative is R80/hour,
then I accrue economic rent of R20/hour.
v) Procedural judgement of fairness
An evaluation of an outcome based on the process whereby the outcome arose, and
not on the characteristics the outcome itself.
Example: In a competition with equal rules, we consider the victory by a runner in a
race to be fair
vi) Substantive judgement of fairness
Judgement based on the characteristics of the outcome, not on how it was
determined.
Example: We may dislike extreme inequality, even if it arose from rules that we
consider fair.
marginal utility: The additional utility resulting from a one-unit increase of a given variable.
↑MUt/ ↓MUg = ↑MRS (i.e. steep gradient)
Written and unwritten rules that govern interactions among people, including the
distribution of the products (output) of their joint effort.
Example: Labour law protecting workers rights
ii) Pareto efficient and Pareto inefficient:
Pareto efficient outcome is one where there is no possible alternative allocation in
which at least one person would be better off, and no person worse off.
iii) Are Pareto efficient allocations fair? Explain.
Pareto efficient outcomes can be fair, but they are not necessarily fair.
Example: an allocation where one person has all the cake, and the other person has
none is pareto efficient is pareto efficient but arguably not fair.
iv) Economic rents
A payment or benefit received over and above what the individual would have
received in his or her next best alternative (or reservation option).
Example: I have a job paying R100/hour and my next best alternative is R80/hour,
then I accrue economic rent of R20/hour.
v) Procedural judgement of fairness
An evaluation of an outcome based on the process whereby the outcome arose, and
not on the characteristics the outcome itself.
Example: In a competition with equal rules, we consider the victory by a runner in a
race to be fair
vi) Substantive judgement of fairness
Judgement based on the characteristics of the outcome, not on how it was
determined.
Example: We may dislike extreme inequality, even if it arose from rules that we
consider fair.
marginal utility: The additional utility resulting from a one-unit increase of a given variable.
↑MUt/ ↓MUg = ↑MRS (i.e. steep gradient)
