Transcript Oscar vela - University of Chicago

The Logic of Collective
Action
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“All economic activity in a market economy is undertaken and carried
through by individuals for their own ideal or material interests”
Max Weber
The Logic of Collective Action
1. Cornerstone concept in modern Public Finance theory
2. Main elements of the logic:
• Organizations (markets, unions, the state) are formed by individuals
with common interests.
• Organizations provide public or collective goods to its members:
goods must be available to everyone if they are available to anyone.
• When organizations are large, it is in the individual interest of the
members to let others pay the burden or costs of the organization
(free ride benefits)
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The Logic of Collective Action
Three Examples:
1. Firms in a Competitive Market
2. Producers in an industry that desire a tariff imposed by the government
3. The worker, the state and taxes
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1. Firms in Competitive Markets
• Firms have common interest in a higher price for industry’s product.
• If all firms reduce output, price rises: all firms are better off.
• Competitive Market (“too many” firms):
One single firm reducing output does not change market price.
• Logic of Collective Action:
Let other firms cut production, price remains high, any individual firm
profit more by ‘deviating’ from cutting production.
P
S1
P
S
P1
MC
P
D
Q1 Q
Q
q1
q
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1. Firms in Competitive Markets
• Equilibrium:
• All firms maximize their individual profit:
MC=MR
• All produce more, price is lower and industry profits are smaller.
• Point: though all the firms have a common interest of higher price, it is
in the interest of each firm that other firms pay the cost.
D
P
P=MR
S
Q
q*
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2. Producers and Tariffs
• Assume that most producers in an industry desire a tariff
• They form a lobbying organization to put pressure on the government
• They campaign: MUST devote time and money to organization
• If the tariff is approved by the government , all producers in the industry
will be better off.
• All producers receive benefits, even if they do not campaign actively
Logic of Collective Action:
(when the organization is big enough)
Let other producers invest more time and money on lobbying.
Is not in the interest of the individual producer to assume ANY of the
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costs himself
3. Workers, wages, the State and Taxes
• A State is an organization: Provides public goods for its members, the
citizens.
• Public goods are available to everyone (national defense)
• It is the interest of all citizens to have better and efficient Public goods.
• Then, they should be willing to pay more taxes to increase the supply of
public goods.
Logic of Collective Action:
-
Let other citizens pay the cost.
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Individual tax contribution is negligible
-
In equilibrium: A higher tax rate is required for everyone, or less public
goods or transfers available
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3. Workers, wages, the State and Taxes
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Consider an economy with populated by I identical workers.
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Workers optimally pick consumption c by choosing how many hours n to
work in a given period t.
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f(n): production function.
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w: wage.
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A government distributes transfers  to workers.
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Government finance transfers by collecting a taxt on the wage (1- t)w.
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Assume a worker does not value transfers to others as much as income to
herself.
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Logic of Collective Action
• Workers are optimal in A.
Ct
(1-t)w
A
• They prefer everyone else to
produce in B (not optimal)
• Workers in A (free ride) effort and
extra revenue paid by workers in B
B
C
• This is NOT an equilibrium
nt
• The economy moves to C, and this
implies more taxes or less transfers
to everyone
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