2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Optimal Departures from Unanimity

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

10. Optimal Club Output and Club Size

11. 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

12. The Optimal Sharing Group

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

14. 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

15. 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

16. 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

17. Optimal Constitutional Rules

18. 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

19. 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

20. The Evolution of Cooperation

21. 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

22. 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