The economic theory of Collective action is concerned with the provision of public goods (and other collective consumption) through the collaboration of two or more individuals, and the impact of externalities on group behavior.
The theory explores the market failures where individual consumer rationality and firms' profit-seeking do not lead to efficient provision of the public goods, i.e. where another level of provision would provide a higher utility at a lower cost.
Note, however, that the theory is not necessarely a challenge to the invisible hand principle of Adam Smith. It only limits the domain in which that principle applies: for purely private good s in ideal competitive market s, the pursuit of self-interest is still efficient.
Exploitation of the great by the small
Mancur Olson made the highly controversial claim that individual rational choice leads to situations where individuals with more resources, will carry a higher burden in the provision of the public good than poorer ones. Poorer individuals will usually have little choice but to opt for the free rider strategy, i.e. they will attempt to benefit from the public good without contributing to its provision. This also encourages the under-production (inefficient production) of the public good.
However, further theoretical analysis showed that this is not the case when individuals have widely-differing perceptions of the utility of the public good. Wikipedians, for example, put a higher value on Wikipedia than non-contributing visitors, while they may not be richer.
While public goods are often provided by governments, this is not always the case. Various institutional designs have been studied with the aim of reducing the collaborative failure. The best design for a given situation depends on the production costs, the utility function, and the collaborative effects, amongst other things. Here are only some examples:
A joint-product model analyzes the collaborative effect of joining a private good to a public good. For example, a tax deduction (private good) can be tied to a donation to a charity (public good).
It can be shown that the provision of the public good increases when tied to the private good, provided that the private good is provided by a monopoly (otherwise the private good would be provided by competitors without the link to the public good).
If the costs of the exclusion mechanism are not higher than the gain from the collaboration, clubs can emerge. James M. Buchanan showed in his seminal paper that clubs can be an efficient alternative to government interventions.
It should be noted that a nation can be seen as a club, whose members are its citizens. Government would then be the manager of this club. This is further studied in the Theory of the State .
In some cases, theory shows that collaboration emerges spontaneously in smaller groups rather than in large ones.
This explains why labor unions or charities often have a federated structure.
Wikipedia is another example, where collaboration is fostered at the level of individual pages; this involves fewer participants than collaboration on the encyclopedia as a whole. Collaboration on wikibooks is more difficult for the same reason.
- Prisoner's dilemma, Pareto efficiency, Nash equilibrium
- Tragedy of the Commons, Common Property Resource (CPR), Tragedy of the anticommons
Todd Sandler, "Collective action: Theory and applications", University of Michigan Press, 1992