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


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


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


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


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



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


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



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


The Optimal Sharing The Optimal Sharing GroupGroup


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


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


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



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


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


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


The Evolution of The Evolution of CooperationCooperation


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


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

Holcombe 07

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