EXAM 2 STUDY GUIDE STATES MARKETS Collective action What is this thing That large groups of individuals with common interests will act on behalf of the common interest This does not happen What readings discussed it The Logic of Collective Action Olson What causes it If they are rational and have self interest they should work to work for collective action but they do not unless coerced Caused by organization that further the interest of the members Individual interests can be advanced most efficiently through individual actions This is because collective goods are non excludable Large groups it is easy to free ride your contribution is not noticed Casual cause of groups forming human nature ubiquity This tendency would make sense for small primitive groups and associations in modern society Present cause of groups in primitive society it was family kin groups In industrialized societies large voluntary associations The typical American does not join large associations Market organizations want less members less competition the benefit is in fixed supply exclusive collective good Whether it is exclusive or inclusive depends on the benefit they are seeking Non Market organizations want more members more to share the costs and benefits the benefit is not fixed in supply inclusive collective good Organized efforts in an inclusive group will try to persuade more members to help but it is not necessary that every member helps More independent behavior of members Organized effort in an exclusive group must have 100 participation or none at all This makes for more bargaining and incentives to hold out They have mutual dependence What are its effects Exploitation of the large by the small Collective goods public goods are non excludable and non rivalrous Small groups are more successful at provided a collective good because it is worth it for one member to bear the cost himself In the small group each member gets a large portion of the benefit It doesn t matter whether the small group is informal or formal The larger the group the further from providing the optimal amount In larger groups the contribution of one is not visible perceptible interdependence They will need to be organized A small subset of the large group must be organized and will also have bargaining costs communicating creating and maintaining the formal group In a small inclusive group if one member stops paying the cots the cost will rise for all the other members and they will cease providing and he will not receive the collective good therefore he will continue paying Larger groups don t further there interests 1 Smaller fraction of good 2 Less motivation to bear the cost of the good 3 Greater the organization costs 3 non market groups Privileged groups at least one member has the incentive to bear all the costs No organization is needed Intermediate groups no member can provide the goods themselves but it s a small enough group to where they may obtain it but organization is needed Latent group large group with no one with incentive to bear the costs Can mobilize a latent group with selective incentives positive or negative Think of examples Groups will act on behalf of common interests ex labor unions cartels Example all the companies want a larger profit They are all making less than they are selling But they all still continue to export more and get a smaller profit They all have a common interest but want the other firms to pay the costs of decreased output Or none of them want to be the one to lobby the government for help Ex It would be any the nations best interest for everyone to voluntarily give but because they don t we have taxes We have taxes because the services the states provides must be available to everyone if available to anyone public goods Small groups obtain regulation to further their wealth Free rider problem What is this thing People who get a collective good without bearing the cost What readings discussed it The logic of collective action Olsen What causes it Large groups when there contributions are not noticeable When the good is non excludable Stronger when groups become larger What are its effects Collective action problem and the individual interests are not furthered by an organization Overcome with smaller groups or selective incentives People may free ride on rent seekers Think of examples One firm rent seeking for certain regulation but all the industries benefiting Selective incentives What is this thing Private goods given to people who have contributed to the collective good Can either be positive or negative which will coerce or induce What readings discussed it Olson What causes it What are its effects Will stimulate a rational individual in a latent group to act in a group oriented way It will mobilize a latent group Think of examples Industry demands for regulation 2008 financial crash What is this thing There is a demand for regulation by small groups and supplied by the political process What readings discussed it The theory of economic Regulation George Stigler What causes it Regulations are designed by the industry Some believe regulations are provided for the public protection Some believe that politics does not have a rational explanation But they are designed by the industry What are its effects Think of examples Social costs of rent seeking What is this thing Rents Making extra profit beyond the supply and demand Getting something for nothing Creating monopolies Rent seeking Spending money to lobby to increase one s wealth without creating wealth Organizing a cartel or monopoly to drive up prices by restricting production The costs of creating a monopoly resources are needed Usually done through the government restricting competition What readings discussed it Tullock the costs of special privilege The theory of economic Regulation Stigler What causes it Originally it was thought that it was a transfer of wealth from consumer to monopolist and that monopolists get them from divine favor wrong The cost is resources being used on manipulation instead of production Monopolies and rents take resources Ex If the government limits of land farmable the farmers will use different technology and still make the same amount but with more production costs Inefficient technology is used to cover up why the subsidy is given instead of just giving cash Used to hide motives Industries want regulation such as quotas What are its effects The society doesn t receive the gains that