Collective Action and Collective Decision Making All groups face collective decision-making challenges Requires that individual preferences somehow be aggregated into a group preference Individuals join groups because collective action is a net positive

Individual Preferences and Group Preferences Groups do not have preferences Individuals within groups have preferences No such thing as group welfare independent of individual welfare

The Pareto Principle and the Rule of Unanimity Market exchanges are Pareto superior moves because voluntary Most political decisions are not Pareto superior Majority rule has a “built-in externality” in that some will be worse off

The Pareto Principle and the Rule of Unanimity Unanimity rule Everyone agrees Political decisions are Pareto improvements only if unanimously approved Unanimity rule ensures all political decisions will be Pareto improvements

Optimal Departures from Unanimity Unanimity not optimal decision-making rule Two types of costs need to be considered in determining optimal rule: Decision-making costs External costs

Optimal Departures from Unanimity Decision-making costs Increase as unanimity is approached External Costs Decline as unanimity is approached Optimal decision-making rule: Minimize the sum of two cost curves

Optimal Departures from Unanimity

Optimal Club Output and Club Size Different characteristics of goods suggest different sized clubs Optimal size of a collective consumption good increases with population

Optimal Club Output and Club Size

Optimal Club Output and Club Size Every good has an optimal sharing group Cost per user declines as number of users increases Marginal congestion cost increases with number of users Optimal sharing group is where two are equal

The Optimal Sharing Group

Representative Democracy Organizations (including government) run by representative board make economic sense for two reasons: Reduction in decision-making costs Gains produced by specialization

The Economic Model of Democracy Representative democracy makes economic sense Majority rule achieves lower cost collective decision-making Does not imply all decisions should be made if majority agrees Majority rule is a means to an end

Optimal Constitutional Rules Optimal rules are rules on which there is consensus Individuals might unanimously agree to make certain decisions by less than unanimous voting rules

Optimal Constitutional Rules How can we decide if consensus exists? Rawlsian Veil of Ignorance Renegotiation of the Contract Distinction between constitutional rules and post-constitutional rules

Optimal Constitutional Rules

Rules and Outcomes: A Procedural Theory of Justice Fair outcomes are the result of fair rules or process Implications for government action Focus on changing unfair processes, not outcomes

The Evolution of Cooperation Prisoner’s dilemma – incentive to free ride Axelrod’s Tournament Computer tournament Shows how cooperation can emerge naturally without external intervention TIT FOR TAT dominant strategy

The Evolution of Cooperation

The Results of Human Action But Not of Human Design Productive institutions are created as the result of human action, not by design Most public sector institutions are created by human design Important not to supplant useful unplanned institutions

The Normative Basis for Government Whether government should undertake most activities is a normative issue Most arguments require interpersonal utility calculations Example: redistribution Actions based on Pareto criteria are preferable to actions based on interpersonal utility calculations