Suppose you’re stranded on an island with two other people; call these people Crusoe and Friday. The island is nicely divided such that you control the only fishing spot, Crusoe has exclusive property rights to coconuts, and Friday has private access to firewood. Consumption of fish, coconuts and firewood are all essential for survival on the island. Fortunately, the three of you have an arrangement to trade with each other under mutually agreeable terms. All is well.
Now suppose as winter approaches (assume your island is sufficiently far from the equator to experience seasons) colder weather requires that you consume more firewood to stay warm. Growing demand for firewood increases scarcity and raises the price Friday charges in terms of fish and coconuts. Under these new conditions, Friday starts to accumulate excess quantities of coconuts and smoked (otherwise it would spoil) fish. For reasons of personal safety you become seriously concerned about Friday’s growing stores. For example, what if: (1) natives attack and demand coconuts or fish to spare your life, (2) sources of coconut and fish become depleted and Friday uses his supplies to extort your services, or (3) other individuals wash ashore and fish and coconuts become extremely valuable.
This “transfer of wealth” becomes very worrying, so you consider your options:
(a) After researching potential technologies for generating heat you discover that it is possible to burn coconut husks. Currently generating the equivalent heat directly from coconuts requires 2x the cost of firewood in terms of coconuts. If you fully adopt this method there is an unknown probability that you could improve your coconut burning technology. However, it is unlikely that you would achieve parity or greater fuel efficiency relative to firewood before the end of winter.
(b) You could spend time searching the island for alternative ways to generate heat. Currently you are unaware of any feasible alternative fuel sources on the island. And searching requires forgoing time spent fishing, which currently is your only source of income.
(c) It is possible to be marginally more conservative with your consumption of firewood. However, doing so reduces your energy such that you are less productive when fishing.
(d) Maintaining the current arrangement is always a possibility.
What is your optimal strategy for long term security and comfort?
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