The Enduring Societal Problem: What to produce? How to produce it? Who gets it?

These are social choices (rather than individual choices) And thus require collective action to effectively/efficiently produce the goods needed by society (military protection; clean water, sewer services, etc.)

A. Collective Action Problem Why is collective action difficult to achieve? PBS example Solution?

An economic and political system will define itself by they way that it answers these fundamental questions. What to produce? How to produce it? Who gets it?

Range of possible answers: Feudalism (9th-14th century) : Fragmentation of political power; public power in a few private hands (A system based on the relation of lord to vassal to serf); armed forces secured through private contracts.

The Leviathan State: Thomas Hobbes Total centralized government control Mercantilism: an economic system designed to increase the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies (post feudalism).

Capitalism/Free Market: John Locke Success of the Individual Business = Success of the Nation Federalism: Laboratories of Innovation Self-Governance: Neighborhood associations Polycentrism: All of the above/Overlapping institutions.

Economists love markets, political scientists love government institutions. Mainstream political economy takes a middle ground. When markets work well leave them alone, but sometimes governments need to step in to solve collective action problems (and Market Failures)

IV. CAUSES OF (SOME) SOCIETAL PROBLEMS: Cause of poverty? Cause of war? Cause of drug abuse? Cause of pollution? Self-Interested behavior

SOLUTIONS OR CAUSES OF THESE PROBLEMS? Markets as the Problem Government as the Problem

THE MARKET: NEGATIVE EXTERNALITIES Voluntary exchange between 2 parties affects a third Pollution Is the market the enemy of the environment? Poor countries with weak markets have pollution The US environment is arguably cleaner than it was in the 1960s/70s (although there has been a decline in air quality recently) A story of a Noisy band or a sloppy neighbor Private costs v. Social costs

STATES AS THE PROBLEM The Predatory State 1. Power to Protect Property = Power to Take Property 2. Fiscal Illusion (citizen’s limited information) Accountability/Responsiveness (is oversight possible?)

B. Transaction Costs 1. Over Regulation 2. Bureaucratic Red Tape 3. Leads to inefficiencies C. Command and Control regulations a. Agency Capture b. Inflexible/inefficient D. Incentives: Pollution Tax; Grants; Credits a. Still requires enforcement

Next Week Market Failures Government solutions to market failures Market solutions to government failures