Nation of Beancounters

How do we overcome the collective action problem?

Posted in Uncategorized by Navin Kumar on December 1, 2011

A friend and I were reading about the foreign-investment-in-retail backlash when the above question came up.

The problem is simple: in a society the costs of a policy are frequently  widely dispersed but the benefits are highly concentrated. For example, consumers would suffer if you imposed a sugar tariff, but domestic sugar producers would benefit. Added up, costs exceed benefits (usually) – but there are millions of consumers, widely dispersed and each enjoying only a little bit of the benefits each, while there are only a handful of producers, each of whom enjoy a relatively large chunk of the benefits. For example, if the benefits to the consumers were only $6 per year each but the benefits to producers were $10,000 per annum each, who do you think will work hard (lobbying, voting en masse, writing letters, protesting, burning effigies, funding campaigns) on getting “their” way about tariffs? I’d be surprised if consumers (the 99% har, har) even bother to find out.

Thus, in a democracy, it is possible for the voting process to result in sub-optimal outcomes (this is merely one of the many ways). This is Mancur Olson’s “Collective Action” problem: in democracies, it is collective action, and not the weighing of costs-and-benefits that create policies. So what can be done to change this system? I thought of a few candidates, not all pleasant:

1. Free market ideology: Yes, ideology is bad. But anti-free-market ideology creates a lot of rent-seekers (as such groups are called) and removing the government from the marketplace (even blindly) can help. This is not to endorse it, but to point out there are good and bad things associated with it. To think of a parallel, think about “blind socialism” which creates a bad social security net which might nonetheless be better than no security net at all.

This is not the same as shock therapy arguments: this is equally applicable to peaceful times. There might be a market imperfection which a policy X can solve. But if X creates rentseekers who will eventually cost society more than the market imperfection, it’s actually a good idea to just leave the imperfection there.

2. Play the interests against each other: This is pretty much the basis of the WTO. Suppose that Indian sugar producers want to sell to Americans (but are cramped by American sugar tariffs) and American car companies want to sell to Indian drivers but are cramped by Hindustan Motors’ monopoly. Create a Super Treaty in which the US scraps sugar tariffs in exchange for India abolishing HM’s monopoly. Now, instead of hoping for American consumers of sugar-covered breakfast cereals to lobby against tariffs, we can depend on the Ford Motor Company to push for the Super Treaty and depend on Sharad Pawar (assuming he’s recovered from being slapped) to fight for the interests of Maharastra’s sugarcane farmers. So we have the exporters fighting the producers, a much more “fair” fight.

3. Crisis: Always a good time for cleaning up a nasty system. The prime example is India in 1991, but look at Greece or Italy now – would they have gotten the reformist, technocratic (and it must be noted, undemocratic) government now, (one that can potentially end the insane jobs-for-votes system) without the crisis?

Can anyone think of anything else? I’ll keep updating this page as I think of more, although each will get it’s own post.

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