[...]... give up fewer than that for a coconut, he will have papayas left over to eat, which he would not have had without the opportunity to trade To summarize: Fred would be better off if he could get more than 2 papayas for a coconut; Harry would be better off if he could give up fewer than 4 papayas for a coconut If, for example, they agree to trade at the exchange rate of 1 coconut for 3 papayas, both would... hunted animals for their skins, the demand and, therefore, the price of animal skins increased This provided an incentive for the Indians to hunt beyond their demand for meat Under communal ownership, when a beaver was killed, an Indian hunter did not have to consider the effects that his action had on the ability of the other hunters to trap and hunt Each hunter, through his own efforts, imposed a... owners, executives, managers, workers, suppliers, and customers – win from your firm’s operation It is all too common for people to think that the only way for one group of “stakeholders” in a firm to gain is for some other group to lose The search is all too frequently for ways to cut costs for one group of stakeholders (owners or managers) by skewering another group (line workers or customers) In this... and defensive behavior The costs associated with making the contract and enforcing it will determine just how extensive the contract will be, and this matter will be considered later in a separate chapter; but for now, assuming the benefits from the contract exceed the costs of contracting and enforcement, we may summarize the foregoing discussion in terms of Figure 1.3 In the state of nature, Fred and... University of California, Irvine has graduate student apartments that are heavily subsidized That is to say, the rents charged for oncampus apartments are several hundred dollars lower than the rents charged for comparable off-campus, privately owned apartments close to campus The university claims that the apartments must be underpriced in order that “good” but “poor” graduate students can afford to follow... apartments for more than a decade, using all sorts of means to prolong their graduations (for example, sending spouses to school, taking years off in the middle of their programs, and pursuing post-doctorate research) In extending their stays, they deny the spaces to other students who might otherwise choose UC-Irvine Moreover, we must question the official argument – they “can’t afford higher rents” for. .. – not just universities – should think seriously before they give their workers in-kind work-related benefits in lieu of salary 28 Chapter 1 The Economic Way of Thinking 29 Tying Pay to Performance Of course, incentives have been found to be important for more mundane, everyday business reasons Tying compensation to some objective measure of firm performance can cause the affected workers’ productivity... percent bonus for good performance could be expected to add 3 to 9 percent to the companies’ after-tax rate of return on stockholder investment If the managerial bonuses are tied to the market prices of the companies’ stock, share prices can be expected to rise by 4 to 12 percent The study also found that the greater the sensitivity of management pay is to company performance, the better the performance.23... based on performance, they tend to undertake riskier, higher paying investments.25 But then, if the bonuses are based on some short-term goal – say, this year’s earnings – instead of some longer-term goal say, some level for the stock price you can bet that managers will tend to sacrifice investments with higher longer-term payoffs for smaller payoffs that are received within the performance period... and potential for conflict among people in the larger community Children can often play together for long periods of time without conflict They each have interests that do not invade the interests of others (which may be described by the clear portions of the circles in Figure 1.1); for example, one may want to play with a truck, one with a bucket and shovel, and another with toy cowboys For periods, . bungalows. A priest, for example, found that he could exchange a pack of cigarettes for a pound of cheese in one bungalow, trade the cheese for a pack and a. cigarettes, prices fell. Radford saw a form of social order emerging in these spontaneous, voluntary, and completely undirected efforts. Even in this unlikely