class: center, middle, inverse, title-slide # 1.4: Collective Action and Public Goods ## ECON 410 · Public Economics · Spring 2020 ### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i> safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/publicS20"><i class="fa fa-github fa-fw"></i> ryansafner/metricsf19</a><br> <a href="https://publicS20.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i> publicS20.classes.ryansafner.com</a><br> --- # The Story So Far - Exchange is really about property rights over goods and services, (not just the goods themselves) - Property rights can internalize externalities - But it can be costly to create and enforce property rights --- # Mancur Olson .left-column[ .center[  Mancur Olson 1932-1998 ] ] .right-column[ - 1962, *The Logic of Collective Action* - 1982, *The Rise and Decline of Nations* ] --- # Another Classic Economic Problem .pull-left[ .center[  ] ] .pull-right[ - .hi[Public Good]: a good that is .hi-purple[non-rival] and .hi-purple[non-excludable] - .hi-purple[Rivalry]: one use of a resource removes it from other uses - .hi-purple[Excludability]: ability or right to prevent others from using it (ownership) ] --- # The Free Rider Problem .pull-left[ - Individual bears a **private cost to contribute**, but only gets a **small fraction of the (dispersed) benefit** of a good - If individuals can gain **access** to the good (nonexcludable) **without paying**, may lead to... - .hi[Free riding]: individuals consume the good without paying for it ] .pull-right[ .center[  ] ] --- # Examples? .pull-left[ .center[  ] ] .pull-right[ .center[  ] ] --- # Market Failure from Public Goods .pull-left[ - No incentive for people to contribute and pay for the good - If enough people obtain the benefits without incurring the costs... - **Not profitable** for private market actors to supply it ] .pull-right[ .center[  ] ] --- # Adam Smith on Public Goods .left-column[ .center[  .smallest[ Adam Smith 1723-1790 ] ] ] .right-column[ "The third and last duty of the sovereign or commonwealth is that of .hi[erecting and maintaining those public institutions and those public works], which, though they may be in the highest degree advantageous to a great society, are, however, .hi[of such a nature that the profit could never repay the expence to any individual or small number of individuals], and which it therefore .hi[cannot be expected that any individual or small number of individuals should erect or maintain]. The performance of this duty requires, too, very different degrees of expence in the different periods of society," (Book VI, Ch. 9). .source[Smith, Adam, 1776, *An Enquiry into the Nature and Causes of the Wealth of Nations*] ] --- # Public Goods `\(\neq\)` "Good for the Public" <img src="1.4-slides_files/figure-html/unnamed-chunk-1-1.png" width="864" style="display: block; margin: auto;" /> --- # Generalizing: Collective Action Problems .pull-left[ - .hi[Collective action problem]: situation where an individual's interest and a group's interest may conflict - Benefits (or costs) of outcome are **nonrival** and flow to *all members* of the group - Decisions & costs need to be incurred by individuals - **Individual preferences** need to aggregate into a **single decision/outcome** ] .pull-right[ .center[  ] ] --- # Collective Action Problem: Examples I .center[  ] --- # Collective Action Problem: Examples II .center[  ] --- # Collective Action Costs I .pull-left[ - Groups may share a **common interest** - But **composed of individuals with their own preferences** - Individuals bear the personal cost of contributing - Individuals gain a small share of the benefits of group action - Additionally, **transaction costs/ bargaining** to get a group to agree on decision ] .pull-right[ .center[  ] ] --- # Collective Action Costs II .pull-left[ - Very hard for group action with .hi[concentrated costs and dispersed benefits] - Easy for group action with .hi[concentrated benefits and dispersed costs] - Remember this idea once we start explaining public policy! ] .pull-right[ .center[  ] ] --- # Implications: Size and Homogeneity .pull-left[ - **Smaller** and more **homogenous** groups face **lower** collective action costs of organizing than **larger** and more **heterogeneous** groups ] .pull-right[ .center[  ] ] --- # Implications: Selective Incentives .pull-left[ - Groups often need .hi["selective incentives"] to **reward contribution** and to **punish free riding** in groups - Positive and negative incentives ] .pull-right[ .center[  ] ]