1. Alex Tabarrok

2. [W]here every man is enemy to every man…there is no place for industry, because the fruit thereof is uncertain, and consequently no culture of the earth, no navigation nor use of the commodities that may be imported by sea, no commodious building…no knowledge of the face of the earth; no account of time, no arts, no letters, no society, and, which is worst of all, continual fear and danger of violent death, and the life of man solitary, poor, nasty, brutish, and short. Thomas Hobbes, Leviathan, XIII.9

4. Government is like fire. It keeps you warm when containedbut burns your house down when not contained.

5. If men were angels, no government would be necessary…In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. James Madison, Federalist 51 James Madison

6.  A constitution is a set of explicit or implicit rules which govern how individuals choose and interact.  The constitution is the framework, the rules, that govern how the game is played.  Choice over the rules of the game can be quite different than choice within the game because the rules will govern many actions far into the future.  Choosing rules is more like choosing from behind a “veil of ignorance.”

7. When will a society of free and rational utility maximizing individuals choose to undertake action collectively rather than privately? Buchanan and Tullock, Calculus of Consent, p.43

8.  Buchanan and Tullock are asking a hypothetical question. Under idealized conditions when will a group of free, rational and equal individuals choose to undertake action collectively.  B and T. take as a given that such individuals will want to have at least a minimal or laissez-faire state. i.e. a state that enforces property rights, protects against theft and assault etc.  Given this baseline of a minimal-state when would, free, rational, and equal individuals want to expand the state further?  The answer is when the state can deal with public good and externality problems at lower cost than would individual private action or voluntary collective action.  It will be key to the theory to understand that government action has costs that must be taken into account in a rational calculus.  Let’s review public goods and externalities.

10.  Why do private firms rarely put on fireworks displays for a profit?  What company is the notable exception to this rule? Why?

11.  Consider Einstein’s theory of relativity. It is:  non-rivalrous and  difficult to exclude non- payers.  Some ideas for products may be patented, copyrighted or trademarked but not all.  Basic research may, therefore, be underprovided in a free market.

12.  An externality is said to exist when A’s actions have a direct effect on B’s utility function or production function. Externalities may be negative or positive.  Negative Externalities 1.Your neighbor contracts Avian Flu and coughs all over you. 2.The winds send acid rain from the United State northwards over the border and into Canada. 3.A and B pump oil out of the same reservoir – the more oil A pumps the deeper B must drill and vice-versa (a negative production externality)  Positive Externalities 1.Your neighbor has his children vaccinated. 2.A farmer crop dusts on a windy day (assuming his neighbors are not organic farmers! – Negative and positive externalities are in the eye of the beholder!) 3.Apple and HP both locate in Silicon Valley thereby creating a larger worker force that each can draw upon – called a positive agglomeration externality.

13.  When A chooses to take the highway he slows everyone else down.  Assume that A saves 5 minutes by taking the highway and slows one thousand drivers by just 6 six seconds each.  Gain to A: 5 minutes  Loss to everyone else: 100 minutes.  Loss/Gain=20!  But does A take into account everyone else’s losses?

14.  Forcing people to pay to provide public goods can make them better off!  No one likes to pay taxes but if the choices are 1. No one must pay, therefore, most people don’t and a neighboring country invades. or 2. Everyone must pay and the neighboring country does not invade.  Then coercion may be better than voluntarism. I am willing to be coerced so long as everyone else is coerced also. I Authorize and give up my Right of Governing my selfe, to this Man... on this condition, that thou give up thy Right to him... This done, the Multitude so united in one Person, is called a COMMON-WEALTH... This is the Generation of the great LEVIATHAN. Thomas Hobbes, Leviathan, Ch.17

15.  A typical econ course would have stopped at the previous slide but Buchanan and Tullock wisely note that collective action/government has costs as well as benefits.  First, there are costs of organizing collective action (bargaining costs, transaction costs, voting costs etc.)  Second, government action by its very nature creates externalities. If the government votes 51 to 49 to tax the 49 to benefit the 51 a negative externality has been created! i.e. there can be forced riders as well as free riders.  Thus, we need to compare three alternatives:

16. AlternativeCost A – Do NothingLive with the externality or underprovision of the public good. B – Voluntary Collective ActionDecision making and organization costs and perhaps not all of the problem will be solved voluntary so some externality and underprovision costs will remain. G – Government/Politics/Coercive Collective Action Decision making and organization costs and the cost of being in the minority – forced riders, corruption, political externality costs.

17.  When is doing nothing the optimal choice? Many externalities should remain private by triviality.  Consider the ugly shirt. Do we want the aesthetic externality created by clothing to be solved by government, or should we try to solve the ugly shirt problem by voluntary collective action or just let it go?  The costs of organizing are usually too high to justify either voluntary or collective intervention.  Dress codes, however, are sometimes used.

18.  But other externalities are private because they are too important to leave to collective action.  Consider the choice of whom to marry, whether and how many children to have, what thoughts to believe. All of these involve extensive public good and externality problems but do we want them “solved” by collective action? Why not?

19.  In 1924, Virginia passed a compulsory sterilization law for the mentally retarded "for the protection and health of the state.”  The law was challenged and went to the Supreme Court where Oliver Wendell Holmes the greatest juror of his time and still revered today said:  “It is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind. The principle that sustains compulsory vaccination is broad enough to cover cutting the Fallopian tubes...Three generations of imbeciles are enough.”  Thousands of Americans were sterilized. The last case in Virginia occurred in 1972. The law was repealed in 1974.

20.  “The principle that sustains compulsory vaccination is broad enough to cover cutting the Fallopian tubes.” O.W. Holmes, Buck v. Bell, 1927.  The principle Holmes is talking about is the externality argument. Doesn’t sound so good now does it?  Why do we reject the externality argument in some contexts?  The argument can certainly lead to a violation of individual rights – a moral constraint.  But there is another problem. The choice to bear or not bear a child is so important that we don’t want that choice to be made collectively – the potential for abuse is too high for a free and rational individual to want to make that choice a collective decision.

21.  Carrie Buck’s case illustrates the potential for abuse.  Holmes’s dictum about three generations of imbeciles was not accidental. To show that the “defect” was inherited the court argued that Carrie’s mother was an imbecile and so was Vivian her daughter.  Vivian was “diagnosed” as an imbecile at 7 months of age.  Vivian died at age eight – she had been on the school honor role more than once.  Carrie lived until 1983, she was by all accounts of normal intelligence.  Carrie’s sister, Dorris, was also sterilized without her consent or knowledge. Carrie Buck. Sterilized in 1927 without her knowledge by the State of Virginia. Vivian Buck being “diagnosed” for feeblemindedness.

22.  Since Carrie Buck was neither feeble-minded nor epileptic why was she committed to the State Colony for Epileptics and Feeble-Minded?  “[Carrie] was apparently raped by a relative of her foster parents, then blamed for her resultant pregnancy. Almost surely, she was (as they used to say) committed to hide her shame (and her rapist's identity), not because enlightened science had just discovered her true mental status. In short, she was sent away to have her baby. Her case never was about mental deficiency; it was always a matter of sexual morality and social deviance.”  Stephen Jay Gould, in “Carrie Buck’s Daughter”.

23.  Other externality/public good problems. 1. What color to paint your house? 2. Where can you build a factory? 3. Bridge and road building? 4. Charity  The best way to solve problems like this may be voluntary collective action – in between letting it be and government action.  Bridges may be financed by tolls – there is some loss of static efficiency but bridges may be better located when privately built than when publicly built (Coase and the marginal cost controversy).  Much charity is provided by voluntary collective action. Is it enough?  Large scale development and contract can handle issues such as restrictions on the color you paint your house.

24.  Costs of underprovision are potentially large.  Voluntary collective action very difficult.  Collective coercive decision making may be best.  But are we really buying national defense?

25.  Externalities and public good problems are not sufficient to justify government action.  Government action has its own costs – decision-making costs and the costs of being coerced if you are in the minority.  To justify coercive collective action we must show that the cost of dealing with public good and externality problems via government is less than the cost of dealing with them in alternative ways. ▪ Aside: Externalities and public good problems are not necessary to justify government action either. Suppose that through a long process of bargaining we were able to provide the efficient level of national defense – i.e. no underprovision. Government could still be justified, however, if coercive collection action could solve the problem more cheaply.

26.  So far we have only talked about the cost of collective action (decision makings costs and coercive externality costs) in general terms. It should be clear, however, that this costs will differ depending on how government is organized and run.  Collective action costs, for example, will be different if majority rules than if say there is a 2/3rds or unanimity rule.  Chapter Six in the Calculus of Consent takes up this issue in greater depth.