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.