5.7, economically feasible allocations and

the surplus. Now before talking about this situation,

let me give you an overview of what we
covered so far.

We started with Angela as an independent farmer,

there was just one person deciding how
many hours to work,

and then we moved to an extreme case
of Angela having no freedom and being

forced to work by another person, Bruno - the dark ages of slavery and feudalism.

Now we get closer to the 20th century
where we introduce institutions and legal

rights for both parties. So Angela
for the first time gains her freedom to

choose whether to work or not to work.
She can walk away if a deal is a bad

deal and on the other hand Bruno gets a

property right to his land. Before that,
he has to protect his land on his own.

Now the state protects his lands so

institution gives property rights and protection to both parties.

Now let's go and see what

changes in our model under this new
scenario.

Previously, we had the red line - what
Angela can produce.

From our previous session we introduced
this green curve,

the minimum that angela needs to eat
in order to survive and not to rebel

against Bruno.
However things change now.

Angela no longer has to work for Bruno.
She has the right to walk away

from Bruno if he gives her a bad deal. So

now Angela's preferences matter.
So, Angela, tell us about your preferences.

ANGELA: So, the first the first thing to say is exactly that,

now I'm in a position where I can
walk away

because i can still survive if I get only two and a half bushels if I don't

work at all for Bruno,
and I get those bushels from the

government.
So that totally changes the situation

and I'll only work for bruno
if he offers me a deal that's acceptable,

and that means a deal
that makes me better off than those

two and a half bushels.
CORE: Exactly. So
basically

what lies outside or below your, shall I say, reservation indifference

curve - this is the minimum that you're
willing

to get to to work am I right?
ANGELA: Yes, so, I've got to be at least as well

off as at point Z in order to engage in a

deal with Bruno.
CORE: So, all these points that exist

in this blue line - which exist in your
head by the way, I cannot see them -

they are equally good as Z,
reservation.

ANGELA: That's right.
CORE: So, if Bruno makes if bruno wants to make you an offer

the minimum he has to give should be

on the blue line, correct?
ANGELA: Correct.
CORE: Exactly.

So, what lies below the blue line is no

longer feasible, all these exploitations scenarios are no

longer visible in this new world where
you

have your rights, correct?
ANGELA: Absolutely
correct.

CORE: Very good, very good. Let's move on to our next stage.

Let's see how bruno reacts this time.
Angela can walk away if Bruno gives her

a bad offer. What are you going to do
Bruno?

BRUNO: Well, now I need to keep in mind two things. I need to keep in mind what

Angela can produce
and I also need to keep in mind the

minimum that Angela wants
for her to accept the deal, so for her

not to walk away from me basically.
CORE: Exactly, so what you can produce is the

red line but this time the minimum that you have to

give her
is the blue line otherwise she would

walk away.
So, as you said, you need to choose a

point where you maximize the gap between what she can

produce and what you have to pay her and you

reach this gap in point D.
BRUNO: Yes.
CORE: The slope

of her indifference curve is the same as
the slope

on the production curve and here you
give the largest gap

between what you have to pay her and
what she produces, correct?
BRUNO: Exactly.

CORE: But let me ask you this, right: do you see the blue line in reality? Do you see her preferences?

BRUNO: I wish I could, but actually I cannot see

her preferences. So all I can see is the red line.

CORE: Exactly. So, how do you find D then?
BRUNO: With a bit of luck,

and actually, with some trial and error.

CORE: Very good, very good. So you reach to D by trial and error.

BRUNO: Yes.
CORE: So let's go to the next stage.

5.9, politics, sharing the surplus. Now,
before starting this session, let me give

you an overview of what we did so far.
We first started with an independent

farmer, Angela, owning her own land and deciding

how many hours to work,
and then we went to the exact other

extreme, that Angela had no freedom and was

forced by Bruno to work, and then
we went to the third stage where we

introduced institutions,
property rights for both parties. Now

Angela had the right to walk away if
Bruno offered her

a bad deal. Now let's go to the fourth
stage. We introduce

democracy. This time Angela
can go and create a union with her

fellow workers,
and go and voice her concerns

about her work condition to politicians,
and push for better legislation in favor

of the workers, in return for giving her democratic

support to the politicians. Now let's see

how things change in this new world.
Let's go back to our model. Under this

new situation, Angela, what are you going to do now

that you have democratic rights?
ANGELA: Well, I think what I'm going to do is

to organize with some
fellow farm workers and to lobby

politicians. We now have the right to do
that, to

shorten working hours, so that's our idea.
CORE: So you propose a legislation to

shorten the working hours to how many?
ANGELA: To four hours.
CORE: And to receive the same

pay as before yes?
ANGELA: Yes, that's absolutely the idea.

CORE: So basically you are legislating
F - you work for four hours

but you get paid the same as before,
four point half bushels of grain, correct?

ANGELA: That's right.
CORE: Very good. How do you feel
about this Bruno?

BRUNO: Well, I need - must
respect the law, so I must accept what

Angela, her co-workers and the union
have decided

so I will accept that they will work for
four hours and they will get

4.5 bushels of grain, but
my rent would have to be reduced from

4.5 bushels of grain in the previous

allocation to 2 bushels of grain at the new poin.
CORE: So basically

Angela gets paid as before, but your rent
gets reduced, yeah?

BRUNO: Yes, exactly.
CORE: Now let me scroll down to

5.10, bargaining to a Pareto efficient
sharing of the surplus, and go to this

model and let's do a recap. So previously

Angela you
pushed for a legislation that you worked

less - for hours, and you got paid the same as

before, and that was represented by point F. Now

my question is this to you: can you - is this the best you

can do for yourself?
ANGELA: Well, looking looking at the situation

and thinking about the small print in
the legislation which actually

would allow me to work longer hours if I
agreed to do so

I can see there's a better deal
on offer, so at the moment

Bruno is getting two bushels of grain
and I can see that if I actually worked

longer hours he could still get
two bushels of grain and I'd get a lot

more, so that would definitely be a better

deal for me at H, than the one
that I was getting at F under

the hours legislation.
CORE: Let's hold. Let's go

through this. So,
you are willing to work more,

from four hours to eight hours, yes?
ANGELA: Yeah.

CORE: And Bruno what do you think of H?

BRUNO: Well, to be honest, H is not any different than F,

so Iam happy to let Angela work
longer if she is, of course, happy too,

because of this small print.
There might be the possibility that I

get a little bit from the extra Angela produces, but

honestly H and F look quite the same to
me.

ANGELA: Well okay bruno, okay, I can see, I can see your point.

So yeah, I would be
happy to pay you a bit more rent than

two, so you know, a bit over two bushels and and

then you'd definitely be better off
than than you were originally at F, so

that sounds to me like a good a good deal for both

of us.
BRUNO: Yes, it is if you're happy to work a

little bit more
and you are willing to give me that

little bit extra
I'm perfectly fine with this deal.

CORE: So, seeing this from outside
are you both happy to meet somewhere

between G and H?
BRUNO: Yes. ANGELA: Yes, we can make a deal. Yes, I'll push

a very hard bargain,
pushing very much towards H.

CORE: And what about you Bruno?
BRUNO: I'll try to push as

strongly as i can towards G.
CORE: And I think you probably meet somewhere in

between.
BRUNO: Yes.

CORE: Thank you, the deal is done.