Gov Notes Exam 1 Syrian crisis illustrates dangers of going public and drawing the red line Collective action problems occur whenever o Compliance with the groups goal costs the indiv something o Cant trust that other members of the group will cooperate Implications o Even when people agree with the groups goal they cant achieve it o Gov exists to reduce collective action problems Indiv will rarely cooperate unless they are compelled to o Question is what is best for the collectivity Recall that whats good or bad depends on whose perspective your Should gov work to prevent collective action problems for businesses or Ways to reduce the collective action problem in absence of gov considering consumers o Characteristics of the group Small Repeated interaction o Characteristics of the situation Availability of subs Non necessities Material benefits Solidary benefits Purposive benefits o Sense of duty purposive benefit o Provide selective benefits that can be withheld from non contributors o 911 hit and federal reserve bank lowers interest rates to stimulate an economic Massive collective action failure Housing crisis o Plenty of blame to go around o Common thread can be traced to the logic of collective action Irrational exuberance by Robert Shiller Housing crisis how did it start recovery Individuals But kept them too low for too long o Low interest rates increased purchasing power for buyers 100 000 8 800 month o Drives up prices o Observe friends and family purchasing homes and making o Thought they needed to buy now or be priced out forever Real estate agents and lenders o Real estate agents wanted to sell as many pricey homes as they could b c paid on commission o Even mortgage lenders had incentives to underwrite risky loans to boost profits Didn t care if the borrower defaulted b c they intended to sell the mortgage to wall street When they exhausted the demand for conventional loans they broadened the pool of borrowers generate increased demand by creating exotic loans that made home buying more accessible Subprime Option ARMs Alternative A Wall street and rating agencies o Wall street didn t care about the quality of the loan b c they were using elaborate regression models designed to minimize risk Bundle slice and dice loans sold to investors around the world as CDO s Insured by Credit Default Swaps CDS o Ratings agencies who were supposed to independently assign risk to the CDO were paid by the Wall Street firms whose CDO they were rating o Repealed laws which would have prevented banks from collateralizing debt Repeal of Glass Steagall created banks that were too big to fail o Prevented regulators from overseeing insurance policies on the collateralized debt Commodity futures modernization act made CDS market unregulated o Politicians promoted the American Dream in which everyone owned a home Politicians Community reinvestment act Recall In the news o Collective action problems occur o Senate Foreign Relations committee authorizes use of force in Syria But resolution sets 60 day time limit and prohibits ground forces Support in senate is about 50 50 o President faces stiff opposition in the House Only 5 of the House supports o There are differences in support levels between House and Senate bc all House members are up for reelection in 2014 Housing crisis in sum o All of the actors involved did what was individually rational for themselves Home buyers real estate agents mortgage lenders and Wall Street firms All thought they would lose out if they didn t get in the game o Unwittingly they set up the greatest asset bubble in modern history to explode spectacularly o It s human nature to want to do what is best for yourself and your family But if everyone thinks this way we ll get collectively suboptimal outcomes Irrational exuberance o If we can t change human nature then how could the bubble have been prevented Discussion o Collective action problem applies to foreclosures During the bubble years homeowners cashed in equity in homes by Homeowners owe more than their homes are worth Neighbors have stopped paying which deteriorates the value of the homes refinancing in the neighborhood Continue to pay or stop paying Homeowners do what s best for them stop paying even if it hurts neighbors o This is why government Gov must regulate discourage destructive behavior Rational Choice Theory o Statement about how the world works Indiv have goals They evaluate their options based on their goals They choose the option that increases their benefits and decrease their costs People are utility maximizers o But sometimes pursuing what s rational for yourself leads to outcomes that are sub optimal for everyone else collective action problem The problem is one of public goods o Public goods are always susceptible to collective action problems o Defining characteristic is that once they are produced everyone consumes experiences them without cost Public goods o Think of goods as commodities Good things Roads Bridges Dams National security Police protection Strong stable economy Bad things Pollution Crime Terrorism war Economic recession something Eating out at a restaurant Getting an education Your cell phone Private goods o Consumption of the good being able to experience the good costs the indiv One major role of gov is to supply public goods o Because of the collective action problem public goods will always be under produced Doesn t mean that they will never be produced just scarcely produced o Why wont anyone else produce them private sector Involve large physical undertakings Too expensive Have to be shared with everyone Indiv contributions are small Counterfactuals o Gmail o Mall security o Gov can One major role of gov is to supply public goods Produce public goods Enforce contracts and agreements Impose regulations so the public good is realized Using coercive power Privatizing gov o Gov is inefficient would a private firm do better at producing public goods o Prisons o Need to structure incentives so that private firms see it as profitable to produce the o But efforts to privatize gov often compromise other qualities that we value public good Fairness equality Communication Transparency Cost saving Command and control Example of privatization o Blackwater USA Paid a lot more than average soldier No laws governing over them Problems with the rules of gov fathers Colonial experience o Rules of gov are created by people o If people are imperfect then the rules and procedures they
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