Confusions about Productivity Conflicts can arise due to confusion about total output, average output, and marginal output. What portion of output do we.

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Presentation transcript:

Confusions about Productivity Conflicts can arise due to confusion about total output, average output, and marginal output. What portion of output do we attribute to capital, labor, and entrepreneurship? The rules of the game matter very much: Conflicts can arise due to confusion about total output, average output, and marginal output. What portion of output do we attribute to capital, labor, and entrepreneurship? The rules of the game matter very much: Property rights are critical to economic productivity.

Make this your home

Easter Island: Our Fishland Location Description It's considered the most isolated inhabited island on the planet, located approximately 2,680 miles northwest of Santiago, Chile. The nearest inhabited island (Pitcairn) is almost 1,200 miles to the west.

Fishland: A “Simple” World Imagine an isolated island that does not trade with the outside world – it is self-sufficient. There are 100 adults who work – fishing all day from the shore to catch fish to stay alive. Each worker has the same ability. Working all day long each person catches four fish. That is their income. Island income is 400 fish per day. One day, a boat floats up. One person grabs it and experiments by going fishing away from the shore. Consider productivity from the boat.

Measures of Productivity Workers Boat Marginal Average Net Social Total on boat Catch Product Product Marg. Prod. Catch on boat Catch Product Product Marg. Prod. Catch = = = = = = = = = = = = =391

Who “Deserves” What? Does marginal productivity of each additional worker on the boat determine wages? Does average productivity of workers on the boat determine wages? What is the wage rate? Workers may be confused about their economic value.

Property Rights and Incentives Rules of the Game Determine the Outcome: Rule 1: Finder’s Keepers One person owns the boat — property is respected. Rule 2: Labor Owns the Boat First worker, then first and second worker, etc. decide if more workers are allowed on the boat. Rule 3: Workers’ Paradise Everyone owns the boat — no right to exclude.

Who gets what? How many workers will there be on the boat under the three different rules? What will the wage rate be under the three different rules? Does the boat owner have to be on the boat? Assume now that the boat must be paid for. Who pays for it? Where do the resources come from? What about repairs? Would it matter if the owner was taxed?