Holcombe 07
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Transcript of Holcombe 07
CHAPTER
7A Theory of Collective
Action
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-2
Collective Action and Collective Action and Collective Decision Collective Decision
MakingMaking All groups face collective decision-All groups face collective decision-
making challengesmaking challenges Requires that individual preferences Requires that individual preferences
somehow be aggregated into a group somehow be aggregated into a group preferencepreference
Individuals join groups because Individuals join groups because collective action is a net positive collective action is a net positive
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-3
Individual Preferences Individual Preferences and Group Preferencesand Group Preferences
Groups do not have preferencesGroups do not have preferences Individuals within groups have Individuals within groups have
preferencespreferences No such thing as group welfare No such thing as group welfare
independent of individual welfareindependent of individual welfare
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-4
The Pareto Principle and The Pareto Principle and the Rule of Unanimitythe Rule of Unanimity
Market exchanges are Pareto Market exchanges are Pareto superior moves because voluntarysuperior moves because voluntary
Most political decisions are not Most political decisions are not Pareto superiorPareto superior
Majority rule has a “built-in Majority rule has a “built-in externality” in that some will be externality” in that some will be worse offworse off
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-5
The Pareto Principle and The Pareto Principle and the Rule of Unanimitythe Rule of Unanimity
Unanimity rule Unanimity rule Everyone agreesEveryone agrees
Political decisions are Pareto Political decisions are Pareto improvements only if unanimously improvements only if unanimously approvedapproved
Unanimity rule ensures all political Unanimity rule ensures all political decisions will be Pareto decisions will be Pareto improvementsimprovements
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-6
Optimal Departures from Optimal Departures from UnanimityUnanimity
Unanimity not optimal decision-Unanimity not optimal decision-making rulemaking rule
Two types of costs need to be Two types of costs need to be considered in determining optimal considered in determining optimal rule:rule: Decision-making costsDecision-making costs External costsExternal costs
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-7
Optimal Departures from Optimal Departures from UnanimityUnanimity
Decision-making costsDecision-making costs Increase as unanimity is approachedIncrease as unanimity is approached
External CostsExternal Costs Decline as unanimity is approachedDecline as unanimity is approached
Optimal decision-making rule: Optimal decision-making rule: Minimize the sum of two cost curvesMinimize the sum of two cost curves
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-8
Optimal Departures from Optimal Departures from UnanimityUnanimity
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-9
Optimal Club Output and Optimal Club Output and Club SizeClub Size
Different characteristics of goods Different characteristics of goods suggest different sized clubssuggest different sized clubs
Optimal size of a collective Optimal size of a collective consumption good increases with consumption good increases with populationpopulation
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-10
Optimal Club Output and Optimal Club Output and Club SizeClub Size
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-11
Optimal Club Output and Optimal Club Output and Club SizeClub Size
Every good has an optimal sharing Every good has an optimal sharing groupgroup
Cost per user declines as number of Cost per user declines as number of users increasesusers increases
Marginal congestion cost increases Marginal congestion cost increases with number of userswith number of users
Optimal sharing group is where two Optimal sharing group is where two are equalare equal
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-12
The Optimal Sharing The Optimal Sharing GroupGroup
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-13
Representative Representative DemocracyDemocracy
Organizations (including Organizations (including government) run by representative government) run by representative board make economic sense for two board make economic sense for two reasons:reasons: Reduction in decision-making costsReduction in decision-making costs Gains produced by specializationGains produced by specialization
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-14
The Economic Model of The Economic Model of DemocracyDemocracy
Representative democracy makes Representative democracy makes economic senseeconomic sense
Majority rule achieves lower cost Majority rule achieves lower cost collective decision-makingcollective decision-making
Does not imply all decisions should Does not imply all decisions should be made if majority agreesbe made if majority agrees
Majority rule is a means to an endMajority rule is a means to an end
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-15
Optimal Constitutional Optimal Constitutional RulesRules
Optimal rules are rules on which Optimal rules are rules on which there is consensus there is consensus
Individuals might unanimously agree Individuals might unanimously agree to make certain decisions by less to make certain decisions by less than unanimous voting rulesthan unanimous voting rules
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-16
Optimal Constitutional Optimal Constitutional RulesRules
How can we decide if consensus How can we decide if consensus exists?exists? Rawlsian Veil of IgnoranceRawlsian Veil of Ignorance Renegotiation of the ContractRenegotiation of the Contract
Distinction between constitutional Distinction between constitutional rules and post-constitutional rulesrules and post-constitutional rules
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-17
Optimal Constitutional Optimal Constitutional RulesRules
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-18
Rules and Outcomes: A Rules and Outcomes: A Procedural Theory of Procedural Theory of
JusticeJustice Fair outcomes are the result of fair Fair outcomes are the result of fair
rules or processrules or process Implications for government actionImplications for government action
Focus on changing unfair processes, not Focus on changing unfair processes, not outcomesoutcomes
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-19
The Evolution of The Evolution of CooperationCooperation
Prisoner’s dilemma – incentive to Prisoner’s dilemma – incentive to free ridefree ride
Axelrod’s TournamentAxelrod’s Tournament Computer tournamentComputer tournament Shows how cooperation can emerge Shows how cooperation can emerge
naturally without external interventionnaturally without external intervention TIT FOR TAT dominant strategyTIT FOR TAT dominant strategy
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-20
The Evolution of The Evolution of CooperationCooperation
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-21
The Results of Human The Results of Human Action But Not of Human Action But Not of Human
DesignDesign Productive institutions are created as Productive institutions are created as
the result of human action, not by the result of human action, not by designdesign
Most public sector institutions are Most public sector institutions are created by human designcreated by human design
Important not to supplant useful Important not to supplant useful unplanned institutionsunplanned institutions
PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 7-22
The Normative Basis for The Normative Basis for GovernmentGovernment
Whether government should Whether government should undertake most activities is a undertake most activities is a normative issue normative issue
Most arguments require interpersonal Most arguments require interpersonal utility calculationsutility calculations Example:Example: redistribution redistribution
Actions based on Pareto criteria are Actions based on Pareto criteria are preferable to actions based on preferable to actions based on interpersonal utility calculations interpersonal utility calculations