People are People: Public Choice and the Logic of Collective Action

Concentrated benefits and diffuse costs explain a lot

Last weekend I participated in the Public Choice Society annual meetings, in Seattle this year, and I'm honored to announce that I will be the PCS President for 2023-2024. Public choice is an important field for understanding social institutions, particularly in situations that require some form of collective decision-making (Choosing in Groups, as Michael and Kevin Munger put it). In defining public choice, I tend to cast a pretty wide net, one that is consistent with those whose pioneering work in the mid-20th century defined public choice: public choice is the analysis of non-market decision-making.

Public choice analyzes collective decision-making applying the same behavioral postulates as we do to analyze individual decision-making:

• Methodological individualism: Individuals behave purposively

• Behavioral symmetry: People are people, with the same incentives and motivations in individual and collective roles

• Politics as exchange: Mutual gains from cooperating by engaging in a political enterprise; this is the Madisonian project, factions and all

Using these core premises, public choice scholars in economics, political science, law, and other fields do research on collective decision-making such as voting (social choice theory), constitutional design, legislative decision-making, regulation, and rent seeking and interest groups.

Not surprisingly, the last two are the areas where public choice informs my research and educational activities – public choice is one of the five prisms of regulatory decision-making that we use in our Institute for Regulatory Law & Economics workshop for public utility regulators. We can use public choice to analyze situations in which profit-maximizing firms attempt to influence regulator or legislative decisions, such as the Illinois legislature’s passage of a bill to create Zero Emission Credit (ZEC) payments to nuclear power plants, without which their owner threatened closure.

One of the most profound public choice insights is that the ability to influence collective decision-making arises from concentrated benefits and diffuse costs (or concentrated costs and diffuse benefits). Connecting this idea to rent seeking and the theory of groups was the path-breaking work of Mancur Olson in his Logic of Collective Action (1965).

The logic is straightforward: suppose a group is considering a decision A, which would generate some benefits and some costs (in other words, a collective action situation where the move to A is not a Pareto move). Suppose that the parties who would benefit from A are very concentrated, while those who would incur costs are dispersed. The parties who would benefit have a greater incentive and lower transaction costs to organizing to lobby the group to adopt A.

Once you are aware of this logic and you look around, you can’t unsee the logic of collective action. It’s everywhere. Nuclear power plant owners lobbying legislatures to pass ZECs to generate revenue for them. U.S. sugar producers, who have had tariff protection from foreign competition since 1789 (yes, really) and who are now concentrated in three large family-owned firms continue to lobby for support, making all of our sugar consumption individually more expensive by such a small amount that we barely notice (unless you’re an economist who argues against tariffs, which is most economists …). Similarly, tariffs on foreign automobiles. The persistence of the post-Prohibition three-tier system of wholesale liquor distribution in U.S. states. Occupational licensing.

All forms of lobbying are grounded in this logic. Machine politics in cities is driven by this logic. The effect of labor unions raising wages for union members while reducing the number of non-union jobs because of firms’ budget constraints. In general, those who stand to benefit more and who have an easier time identifying their fellow travelers and banding together with them will have outsized influence on collective decision-making according to this logic.

The concentrated benefits-diffuse costs logic is so foundational that it intersects with other models of collective decision-making. Take labor unions, for example. You can analyze labor unions using a club good model (also a product of public choice research). Club goods are nonrival (more consumers does not mean more costs) but excludable, so you have to pay to access the benefits. In the linked Marginal Revolution University video, Alex Tabarrok argues that cable companies and channels provide club goods, and so do labor unions – the members get the benefits, and that dynamic intersects with the dynamic of lobbying for union protections and particular legal status, while non-union workers who will see fewer opportunities have less ability to organize to make their preferences known to policymakers.

Sometimes the interests that are concentrated line up with what would be the best, most welfare-enhancing possible outcome from the collective decision. Sometimes they don’t. In all cases the concentrated interests have an incentive to argue that their interests are perfectly aligned with “the public interest”.

Famously, in 1983 Gary Becker published his analysis of interest group influence, A Theory of Competition Among Pressure Groups for Political Influence. Becker argued that the interplay and rivalry among competing groups in the market for influence would drive out inefficiencies in lobbying, and would thus produce socially efficient outcomes. While Becker cited Olson (1965), he doesn’t take on board the effects of the power asymmetry in the market for influence that Olson identified. If different interests have different incentives and abilities to organize into groups because of concentrated benefits and diffuse costs, that undermines Becker’s efficiency argument.

Concentrated benefits and diffuse costs are pervasive, and awareness of this model and the logic of collective action can lead to countervailing efforts. For example, the Federal Energy Regulatory Commission (FERC) has established an Office of Public Participation to communicate regulatory affairs more extensively to people other than “the usual suspects” who have strongly concentrated interests to engage directly in regulatory proceedings. Given how dispersed and diverse the people and interests are who aren’t organized, there are some natural limits to how effective such efforts can be at removing the power asymmetry, but some counterweight is better than no counterweight.