Sunday, April 17, 2011

Joe B. Stevens. 1993. The Economics of Collective Choice.

Joe B. Stevens. The Economics of Collective Choice. Boulder: Westview Press, 1993. Chapter 5.

This chapter considers whether there can be voluntary solutions to market failure without resorting to coercion by the government. For voluntary action to be effective, it would have to lead to a more efficient level of output or to the right people sharing more fully in the rewards.

  1. Willingness-to-pay (WTP) = what an individual would pay to gain access to new opportunities
  2. Willingness-to-accept (WTA) = what an individual would accept as payment to be deprived of something; the consumer surplus is the minimum payment that would be required to compensate a consumer for reduced availability of a nonmarket good.
    • Discrepancies between the WTP and WTA are due to fundamental differences in how people view potential gains and how they view potential losses. (Prospect Theory)
  3. Marginal congestion costs - for an impure public good, the disadvantages of increased crowding associated with more people in a club. (For example, in a club that provides fire-fighting services, too many members increases the chances that the fire-fighting forces are occupied, helping another member, when your house catches on fire.)
  4. Efficient club size - the level of membership that would equate the (falling) marginal reduction in service cost with the (rising) marginal congestion costs.

  • There might be conflict between self-interest and the collective interest, such as in the case of the Prisoner's Dilemma, in which self-interested actions lead to a collectively worse outcome.
  • The following help to allow for voluntary provision of goods:
    • Researchers argue that feedback, learning, and game replay allow for the possibility of cooperation.
    • It is possible for two individuals to work together to Pareto-efficiently provide a public good by paying prices equivalent to their respective marginal benefit of the public good, but free-riding would still be an issue.
    • Externalities can be eliminated with property rights.
    • People might not free-ride or might help to provide a public good for altruistic reasons.
    • People may choose not to free ride because of the low cost of participation, because of the potentially high cost of nonparticipation (species extinction, for example), and because individual action may be crucial in affecting outcomes. 
  • Hindrances to the voluntary provision of public goods:
    • If transaction costs exist, there would be less incentive for two parties to agree on a Pareto-efficient quantity of the public good. If costs are high enough, they can prevent negotiated solutions altogether.
    • Even with the allocation of property rights, the costs (transaction, monitoring, etc.) of a voluntary solution using property rights with unorganized and dissimilar groups are often so high that they siphon off the willingness to pay for the externality.
  • Conditions for club provisions of goods:
    1. "Provision" condition - labor and capital resources would need to be provided until the summed marginal benefits to members from reducing the congestion costs are equal to the marginal cost of provision.
    2. "Toll" or "utilization" condition - an efficient toll should equate a member's marginal benefit from use with the marginal congestion costs that might be imposed on others. 
    3. "Membership" condition - new members should be added until the net benefits from membership (through cost reductions to others) equal the congestion costs imposed on others by that member's use of services. If members have different preferences and incomes, there are likely to be differences in the amount and value of property to be protected. 

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