2. Problems
• Market and Government Failure
• Uncertainty
• Lack of bargaining power
• Not able to harness Economies of Scale
3. Solutions
• Develop mechanisms managed by self to
serve shared interest
– COLLECTIVE ACTION
• Trust
• Reduce the uncertainty
• Harness economies of scale
• Market linkage
• Technology
4. What is collective action?
• Action taken by a group (either directly or on
its behalf through an organization) in pursuit
of members’
perceived shared interests
• Joint action for the same goal
• Actions to achieve a common objective, when
the outcomes depend on interdependence of
members
5. • Collective action requires
– involvement of a group of people
• Members can contribute in various ways to achieve the
shared goal: money, labor or in kind contributions (food,
wood)
– common action which works in pursuit of that
shared interest
– Own labour or product – usage based
6. Manifestation of Collective Action
• Event
– a one time occurrence
• an institution
– rule of the game applied over and over again
• A process
7. Institutionalization of Collective Action
• Institutions are rules of the game of a society
or more formally are humanly devised
constraints on human interaction
• Institutionalization reduces transaction costs of
renegotiation, as well as uncertainty
– Transaction cost increases with incomplete
information and limited mental capacity to
process information
• Cooperation is required for building institution
8. Role of Manager
• Identify the transaction cost
• Build institution to reduce transaction cost
• Lay out formal rules and regulation suitable
for community/society
• Implement rules and regulations
• Monitor rules and regulations
• R&D
10. Major actors / stakeholders
• Author, McCoy
• Anthropologist, Stephen
• Four back-packers from New Zealand
• Swiss couples
• Japanese hiking club members
• Sherpa Pasang and his group of porters
13. How did they help?
• All stopped and gave aid and comfort
• At 15500 feet, New Zealanders came back and dumped the sadhu
• McCoy took his pulse and suggested treatment
• Sherpas carried sadhu down to a rock in the sun at about 15000feet
and had pointed out the hut another 500 feet below
• Japanese had given food and drink
• Shephen and the Swiss provided clothing
14. What they had not done?
• Pasang had not agreed to carry the sadhu by group of porters down
to the hut
• They did not ensure survival of the sadhu
• Each was willing to his bit just so long as it was not too inconvenient
15. What went wrong?
• No collective plan or purpose
• No one person was willing to take ultimate responsibility
• Each was willing to do his bit just so long as it was not too inconvenient
• No recognized leader
• Process to address the situation and develop a consensus did not
exist
• Cross-cultural composition of the teams
• Lack of information about the sathu and his motives / purpose
16. Resemblance with business environment
• Important goal at stake (crossing the pass and ascending 18000 feet)
• Good deal of stress
• The climbers found themselves in an unexpected or unplanned
situation which required immediate action
18. What are institutions?
• Institutions are the rules of the game in a society
or, more formally, are the humanly devised
constraints that shape human interaction
– formal rules that include laws and contracts
– informal means such as social norms and conventions
that evolve over time
• Institutions are defined as helping form stable
expectations in exchange
• Institutions created or evolved in response to
uncertainty, risk and information cost associated
with living and transacting in an imperfect world
– Exp. Sharecropping
19. • Which objects (?) are institutions?
– Money ?
– RBI ?
– IRMA?
– Sea level?
– Marriage?
– Market?
– Government?
– Social club?
– Gravitation?
– Photosynthesis?
– Painting?
– International Boundary?
– Football Game?
– Language?
20. The Logical Structure of Institutional facts
Collective intentionality
Intentionality: Feature of
Mind
Assignment of function
Impose functions on objects where
the object does not have function
Collective assignment of function
Collective Assignment of Status
The object or person performs its function only in virtue
of collective acceptance by the community that the
object or person has the requisite status
21. Economic Institutions
Function Examples Typical formal
Regulating Agency
Informal
Regulating Agency
Property rights Land rights
Inheritance law
Intellectual property
right; patents; copyright
Land registries
Patent Offices
Oral history, chiefs
and local political
authorities,
Customs
Reciprocity:
facilitating
transaction
Weights, measures
Contract laws, dispute
arbitration
Auditing and accounting
conventions
Standards bureau
Civil court,
arbitration councils
Professional
associations
Elders, religious
courts
Cooperation Regulations on
cooperatives;
Cooperative Societies
Act
Ministry Social norms of co-
operation
22. How do Institutions Affect Economic Growth and Poverty
reduction
• Investment – property rights
– Easy to trade
– Obtain credit
– Retain resonable share of profits
– Insure against risks
– Investment is encouraged
• Technical Innovation –intellectual property
rights
23. Economic Organization and
Institution
• Economic Organisation
– Facilitate transaction and co-operation between
individuals
– reinforce interaction between factors
– Allow those without immediate access to factors of
production to obtain credit, rent land, trade and to
form small companies or cooperatives
• Economic Institution much broader and deeper
concept
• Both reduce transaction cost
24. Drivers of Economic Growth
• Factor Accumulation
• Technological progress
• Institutions structure incentives in human
exchange, whether political, social, or
economic
27. Economic Institutions and Growth
• Economic institutions shape the
– Incentives
• Influence investments in physical and human capital and
technology and organisation of production
– Distribution of resource
• Wealth, physical capital, human capital
• Different EI different distribution
– conflicts
28. • Conflict of interest
– Which group’s power would prevail?
• Political power
May not be maximum growth promoting
29. Why groups with conflicting interests do not agree on
economic institutions that maximise growth?
• Commitment problem
– Individuals who have political power cannot
commit not to use it in their best interest
– Credible compensatory transfers and side-
payments cannot be made
Political
power
Economic
Institution
Efficiency
Distribution
Political
Institution
30. Why not political institutions resolve commitment problem?
Distribution of political power is endogenous
31. • power that originates from political
institutions (determine constraints and
incentives in political sphere)
• determines constrains on and incentives of
key actors
de jure political power
32. • Even if political power not allocated by political
institutions but still possessed
• Depends on
– ability of the group to solve collective action
problem;
– Economic resource which determine ability to use
existing political institutions and also hire and use
force against different groups
de facto political power
33. • Those who hold political power influence
evolution of political institutions
– de jure
– de facto occasionally creates changes in political
institutions
34. Institutional change
• Economic institutions are determined by political
institutions and distribution of resource
• Endogenous institutions
– Political institutions and distribution of resource stable
– Reproduce initial relative wealth disparity in future
– Framework also emphasises potential for change
state
variable
35. People and Political Institutions
• Political institutions place all political power in the
hands of single individual or group of individuals
• Without checks of political power, political holders
are more likely to opt for a set of economic
institutions that are beneficial for themselves and
detrimental for the rest of the society
Solution
• Distribute power amongst many
• Distribute income among many
How to
distribute?
36. Role of “shocks”
• Modify balance of (de facto) political power
– Changes in technology
– International/External environment
• Governance structure
• Major change in political institutions and
therefore economic institutions and economic
growth
38. Mercantilism
16th to 18th Century
Rise of de facto political power of
gentry and merchants
Change in de jure political power
Towards capitalism (mid 18th Century) and
Democracy
39. Why Good Economic Institutions Do not Evolve
• Political institutions place checks
• Likely to arise when political power is in the
hands of a relatively broad group
– Commitment problem tackled
• Likely to arise and persist when only limited
rents that power holders can extract from rest
of the society
– Rents encourage to opt for a set of economic
institutions that make expropriation of others
possible
40. • Would Collective Action be helpful in
Developing Good Economic Institutions?
42. Market Equilibrium
• Equilibrium in the market results in maximum
benefits, and therefore maximum total
welfare for both the consumers and the
producers of the product.
43. Welfare of Consumer and Producer
• Consumer surplus measures economic welfare
from the buyer’s side.
• Producer surplus measures economic welfare
from the seller’s side.
44. • Consumer Surplus
– Willingness to pay is the maximum amount that a
buyer will pay for a good.
– It measures how much the buyer values the good
or service
– Consumer surplus is the buyer’s willingness to pay
for a good minus the amount the buyer actually
pays for it.
46. • Producer Surplus
– Producer surplus is the amount a seller is paid for
a good minus the seller’s cost.
– It measures the benefit to sellers participating in a
market.
51. MARKET EFFICIENCY
• In addition to market efficiency, a social
planner might also care about equity – the
fairness of the distribution of well-being
among the various buyers and sellers.
53. MARKET EFFICIENCY
• Three Insights Concerning Market Outcomes
– Free markets allocate the supply of goods to the
buyers who value them most highly, as measured
by their willingness to pay.
– Free markets allocate the demand for goods to
the sellers who can produce them at least cost.
– Free markets produce the quantity of goods that
maximizes the sum of consumer and producer
surplus.
55. quantity
price
Exploitative
price
offered
by
private
trader
Domestic supply curve
Total Supply curve
(Domestic s + Foreign)
Domestic Supply curve
after cooperative
A
B
C
Fall
in
cost
of
production
due
to
cooperative
P1
Q1
D1
Grains from Cooperative
P1, Q1 is initial equilibrium price and quantity
D1 is initial amount of milk purchased from domestic producers
Producer Surplus (PS) lost due to exploitative pricing of domestic milk
PS obtained by domestic milk producers when price is exploitative
ABC is the Total Surplus (TS) after cooperative is formed
TS increased after cooperative
Both consumer surplus and PS increase after cooperative
56. Evaluating the Market Equilibrium
• Collective Action increases Economic
Efficiency
• Free market alone is less efficient
57. Evaluating the Market Equilibrium
• Market Power
– If a market system is not perfectly competitive,
market power may result.
• Market power is the ability to influence prices.
• Market power can cause markets to be inefficient
because it keeps price and quantity from the
equilibrium of supply and demand.
58. Externalities
• Externalities
– created when a market outcome affects
individuals other than buyers and sellers in that
market.
– Welfare more than just the value to the buyers
and cost to the sellers.
• When buyers and sellers do not take
externalities into account when deciding how
much to consume and produce, the
equilibrium in the market can be inefficient.
59. Market Failures
• Market fails to produce the right amount
of the product
• Resources may be
• Over-allocated
• Under-allocated
LO1 5-19
60. • Recall: Adam Smith’s “invisible hand” of the
marketplace leads self-interested buyers and
sellers in a market to maximize the total
benefit that society can derive from a market.
But market failures can still happen.
61. EXTERNALITIES AND MARKET
INEFFICIENCY
• An externality refers to the uncompensated
impact of one person’s actions on the well-
being of a bystander.
• Externalities cause markets to be inefficient,
and thus fail to maximize total surplus.
62. EXTERNALITIES AND MARKET
INEFFICIENCY
• An externality arises...
. . . when a person engages in an activity that
influences the well-being of a bystander and yet
neither pays nor receives any compensation for
that effect.
63. EXTERNALITIES AND MARKET
INEFFICIENCY
• When the impact on the bystander is adverse,
the externality is called a negative externality.
• When the impact on the bystander is
beneficial, the externality is called a positive
externality.
64. EXTERNALITIES AND MARKET
INEFFICIENCY
• Negative Externalities
– Automobile exhaust
– Cigarette smoking
– Barking dogs (loud pets)
– Loud stereos in an apartment building
66. EXTERNALITIES AND MARKET
INEFFICIENCY
• Negative externalities lead markets to
produce a larger quantity than is socially
desirable.
• Positive externalities lead markets to produce
a smaller quantity than is socially desirable.
67. Pollution and the Social Optimum
Equilibrium
Quantity of
Aluminum
0
Price of
Aluminum
Demand
(private value)
Supply
(private cost)
Social
cost
QOPTIMUM
Optimum
Cost of
pollution
QMARKET
69. Other Reasons of Market Failure
• Incomplete Information
– Consumers do not have accurate information
about market prices or product quality
– Lack of information may give producers an
incentive to supply too much or too little
– Consumers may not buy product even though it is
beneficial to buy
– Lack of information may prevent some markets to
develop
70. PUBLIC POLICY TOWARD
EXTERNALITIES
• When externalities are significant and private
solutions are not found, government may
attempt to solve the problem through . . .
– command-and-control policies.
– market-based policies.
71. PUBLIC POLICY TOWARD
EXTERNALITIES
• Command-and-Control Policies
– Usually take the form of regulations:
• Forbid certain behaviors.
• Require certain behaviors.
– Examples:
• Requirements that all students be immunized.
• Stipulations on pollution emission levels set by the
Environmental Protection Agency (EPA).
72. PUBLIC POLICY TOWARD
EXTERNALITIES
• Market-Based Policies
– Government uses taxes and subsidies to align
private incentives with social efficiency.
– Pigovian taxes are taxes enacted to correct the
effects of a negative externality.
73. PUBLIC POLICY TOWARD
EXTERNALITIES
• Examples of Regulation versus Pigovian Tax
– If the EPA decides it wants to reduce the amount
of pollution coming from a specific plant. The EPA
could…
– tell the firm to reduce its pollution by a specific
amount (i.e. regulation).
– levy a tax of a given amount for each unit of
pollution the firm emits (i.e. Pigovian tax).
75. PRIVATE SOLUTIONS TO
EXTERNALITIES
• Moral codes and social sanctions
• Charitable organizations
• Integrating different types of businesses
• Contracting between parties
76. Private Solutions: Coase Theorem
• The Coase Theorem is a proposition that if private
parties can bargain without cost over the allocation of
resources, they can solve the problem of externalities
on their own.
• Whatever the initial distribution of rights, the
interested parties can reach a bargain in which
everyone is better off and the outcome is efficient
– distribution of property rights have implications
• Transactions Costs
– Transaction costs are the costs that parties incur in the
process of agreeing to and following through on a bargain.
77. Why Private Solutions Do Not Always Work
• Sometimes the private solution approach fails
because transaction costs can be so high that
private agreement is not possible.
• Number of individuals involved on both sides
high
• Need to resolve Collective Action Problem
78. PUBLIC POLICY TOWARD
EXTERNALITIES
• Market-Based Policies
• Tradable pollution permits allow the voluntary
transfer of the right to pollute from one firm
to another.
– A market for these permits will eventually
develop.
– A firm that can reduce pollution at a low cost may
prefer to sell its permit to a firm that can reduce
pollution only at a high cost.
79. Climate change – the biggest market failure the
world has ever seen?
80. The equivalence of corrective taxes & pollution permits
Price of
pollution
In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demand curve
determines the quantity of pollution. In panel (b), the EPA limits the quantity of pollution by limiting the
number of pollution permits, and the demand curve determines the price of pollution. The price and
quantity of pollution are the same in the two cases.
0 Quantity of
pollution
(a) Corrective tax (b) Pollution permits
Demand for
pollution rights
Q
P
Corrective tax
1. A corrective tax sets
the price of pollution . . .
2. . . . which, together
with the demand curve,
determines the quantity
of pollution.
Price of
pollution
0 Quantity of
pollution
Demand for
pollution rights
P
Q
Supply of
pollution permits
1. Pollution
permits set
the quantity
of pollution . . .
2. . . . which, together
with the demand curve,
determines the price
of pollution.
81. Carbon Trading
• Carbon Trading is market-based mechanism to
incentivise reduction of greenhouse gas
emissions in a cost-effective and economically-
efficient manner
• Under Carbon trading, a country having more
emissions of carbon is able to purchase the right
to emit more and the country having less
emission trades the right to emit carbon to other
countries. More carbon emitting countries, by
this way try to keep the limit of carbon emission
specified to them
82. Carbon Markets
• EU Emissions Trading System (EU-ETS)
– Operates in the 28 EU countries and the three EEA-
EFTA states (Iceland, Liechtenstein and Norway)
– covers more than 11,000 power stations and
industrial plants
• Clean Development Mechanism (CDM)
– emission-reduction projects in developing
countries can earn certified emission reduction
credits.
– These saleable credits can be used by industrialized
countries to meet a part of their emission
reduction targets under the Kyoto Protocol
83. Carbon Credits
• A carbon credit is a generic term for any tradable certificate or permit
representing the right to emit one tonne of carbon dioxide or the mass of
another greenhouse gas with a carbon dioxide equivalent
• Carbon Credits are the production cost, for which, ultimately the consumer
pay
• Cap and trade (or emission trading) – compliance market
– a limit (or "cap") on certain types of emissions or pollutions is set, and
companies are permitted to sell (or "trade") the unused portion of their
limits to other companies that are struggling to comply.
• Offset trading (trading in project based carbon credit) – voluntary market
– restore forests, update power plants and factories or increase the energy
efficiency of buildings and transportation
– UN's Clean Development Mechanism (CDM) is the largest offsetting
scheme with almost 3,000 registered projects in the global South as of
April 2011
– Offsetting does not reduce emissions, but allows companies and
governments in the North that have the historical responsibility to clean
up the atmosphere to buy credits from projects in the South.
84. CDM in India
• ONGC has 6 CDM projects registered with UNFCCC
(United Nations Framework Convention on
Climate Change) and is the only PSU to achieve
this feat.
• Carbon Trading in Ankleshwar
– A sulphuric acid treatment plant, using technology
imported from Canada, and a pharmaceutical company
wanting new technology to help cut nitrogen dioxide
emissions are among those seeking revenue from
carbon credits
• NGOs and MFIs
– SEWA and Grameen Shakti for solar lighting
– CTRAN, A BASIX group company for solar water heaters
85. Carbon Market Failures
• No legally binding agreement to reduce emission
• More credits allocated than needed
– Low price of carbon
– No incentive for carbon saving
• "total lack of environmental integrity“ of CDM
• High transaction cost on the process for applying
for mitigation and adapting financing
• Need International Collective action
– Provision of global public good
– The transparency and comparability of national action
across a range of dimensions of effort are key to
mutual understanding and recognition of what others
are doing, as well as ensuring public accountability
86. Efforts
• Kyoto Protocol – 1997
– Binding international action and agreed specific
commitments from 2008 to 2012
– Entered into force 2005 and ratified by 162
countries
– "common but differentiated responsibilities.“
– Market based mechanisms (Carbon market)
– US and Australia declined to join the Protocol
• Post-Koyoto: China, India, and the United States
have all signaled that they will not ratify any
treaty that will commit them legally to reduce
CO2 emissions
87. United Nations Framework Convention
on Climate Change
• UNFCCC is an international environmental
treaty negotiated at the Earth Summit in Rio
de Janeiro in 1992
• Outlines how specific international treaties
(called "protocols" or "Agreements") may be
negotiated to set binding limits on greenhouse
gases.
88. • Conference of Parties
– The COP is the supreme decision-making body of the
Convention (UNFCCC )
– COP is to review the national communications and
emission inventories submitted by Parties. Based on
this information, the COP assesses the effects of the
measures taken by Parties and the progress made in
achieving the ultimate objective of the Convention.
– COP serve as the meeting of the Parties to the Kyoto
Protocol (CMP)
• Collection Action
89. COP 21 or CMP 11 - 2015
Paris Agreement
• Holding the increase in the global average
temperature to well below 2°C above pre-
industrial levels and pursuing efforts to limit the
temperature increase to 1.5°C above pre-
industrial levels
• Making finance flows consistent with a pathway
towards low greenhouse gas emissions and
climate-resilient development
• reflect equity and the principle of common but
differentiated responsibilities and respective
capabilities, in the light of different national
circumstances.
90. Ratification
• reflect equity and the principle of common but
differentiated responsibilities and respective
capabilities, in the light of different national
circumstances.
– USA ??? China ????
• Each country that ratifies the agreement will be
required to set a target for emission reduction or
limitation, called a "nationally determined
contribution," or "NDC," but the amount will be
voluntary
• Name and shame
• No binding constraint
• 2017 USA withdrew from Paris Agreement (four-year
exit process)
92. Case: Kendu Leaf Trade in Odisha
• Non-timber forest product (NTFP)
• Used in Bidi wrapping
• Odisha is the third largest producer of kendu leaf
next to M.P. and Chatisgarh
• In Odisha, 8000 collection centres where
procurement and processing of leaves takes place
• Annual 4.5 to 5 lakhs quintal, which is about 20%
of the countries annual production
• Kendu leaves provide employment in lean period
of summer
• Creates 30 million man-days within three to four
months in Odisha
93. Evolution of Institutions
• Princely regimes of western Orissa
– Feudal rulers had monopoly control and earned a lot
• After independence Orissa government established state
control
– Procurement and trade remained under private traders who
used to bribe bureaucrats and politicians
• In 1973, it was nationalised (like other NTFP) to check
monopoly of big traders, provide fair prices to pluckers
and secure their livelihood
– these can be sold only to government agencies
– Nationalisation reduces the number of legal buyers, chokes
the free flow of goods, and delays payment to the gatherers,
– contractors entering from the back door, but they must
now operate with higher margins required to cover
uncertain and delayed payments by government agencies
– This all reduces tribals' collection and incomes
94. KL operations start with bush cutting
around mid or late February
Munshis are local agents who help KL
department in bush cutting, collection
and other operations
Orissa Kendu Leaves (Control of
Trade) Rules 1962
Only Government authorised officers,
agents of government, could
purchase or transport KL
95. Collective Action
• In 1997, around 85 villages came together to form a
loose network, which was named the Maa Maninag
Jungle Surakhya Parishad
• Facilitation by Vasundhara (NGO)
• Involvement of woman
• On 3 April 2001, about 2,000 women from 95 villages
held a demonstration at Ranpur, the block
headquarters, and rallied to the office of the tahsildar
and Forest Range Officer to give a memorandum
demanding the opening of KL phadis in the area
• In 2002, the government established two KL phadis and
promised to open more in the coming year
96.
97. • Kendu leaf wing of forest department manages all
operations related to bush cutting, production and
processing
• Odisha Forest Development Corporation (OFDC) sells as
commission agent
• Net profit goes to state exchequer
– 50% ploughs back for development activities through
panchayat samitis and gram panchayats
– Bureaucratic stranglehold on the fund
– Appropriated by powerful elites
– Siphoning to non-kendu leaf growing areas
• Exploitation
– Rs. 1063 in 40 days for entire family
– 3-4 months to receive payment
– Primary collectors are “unskilled” labours employed to
collect produce
– State property by virtue of nationalisation
98. KL Marketing
KL collection and processing is done by FD, its sale
is entrusted with OFDC under "Joint Scheme of Operation of Kendu Leaf Trade."
99. Impact
• Number of pluckers’ card have reduced
– 9.33 lakh in 2003
– 9.06 lakhs in 2004
– 7.43 lakhs in 2008 and 2009
101. Forest Rights Act 2006
• NTPF under minor forest products
• Act vests powers in gram sabha
– Rights of ownership
– Access to collect
– Use and dispose of minor forest produce
• Amendment 2012
– Fulfilment of livelihood needs of self and family
– Rights to sell
– Individual or collective processing, storage, value addition,
transportation
• Orissa Forest Act 1972 has not been amended on the
lines of FRA
– Communities and gram sabha remains ignored
102. Deregulation
• Deregulated five days before plucking on pilot basis
– uncertainty
– did not create any enabling environment and support
mechanism for gram sabhas
• Kendu leaf department, panchayat, gram sabha
did not come to purchase leaf from pluckers
• Gram sabhas failed to recover money invested in
procuring and processing for lack of market
support
• Pluckers left to the mercy of middleman
• It was projected that project deregulation would
not benefit pluckers and the existing system of
state monopoly was best
104. Need New Economic Institutions
• Democratic institution
– Odisha Self Help Cooperative Act 2001
• Community enterprise
– Collection centre managed by communities
– Transparency and accountability to counter corruption
and misappropriation
– Pluckers to plough back profits
– Skill and necessary training to control trade
– Long term arrangement with buyers
– NGO involvement to resist exploitation
• Tripartite agreement : sellers, buyers and NGO
– Finance
108. Girijan Co-
operative
Corporation
Ltd.
Collector
A govt. of AP
Undertaking
Forest
Department
Trader
Leaf
Plate
Maker
Market
Uncertainty, logistic
bottleneck
Centre for Public Forestry
Training
Forest Department
CPF (NGO)
Government
109. THE DIFFERENT
KINDS OF GOODS
• When thinking about the various goods in the
economy, it is useful to group them according
to two characteristics:
– Is the good excludable?
– Is the good rival?
110. THE DIFFERENT
KINDS OF GOODS
• Excludability
– Excludability refers to the property of a good
whereby a person can be prevented from using it.
• Rivalry
– Rivalry refers to the property of a good whereby
one person’s use diminishes other people’s use.
111. THE DIFFERENT
KINDS OF GOODS
• Four Types of Goods
– Private Goods
– Public Goods
– Common Resources
– Natural Monopolies
112. THE DIFFERENT
KINDS OF GOODS
• Private Goods
– Are both excludable and rival.
• Public Goods
– Are neither excludable nor rival.
• Common Resources
– Are rival but not excludable.
• Natural Monopolies
– Are excludable but not rival.
114. PUBLIC GOODS
• A free-rider is a person who receives the
benefit of a good but avoids paying for it.
• The free-rider problem prevents private
markets from supplying public goods.
• Government can provide non-excludable and
non-rival good
• Collective Action can also provide public
goods
115. Some Important Public Goods
• National Defense?
• Technical Innovation?
• Basic Research?
• Fighting Poverty?
• Cooperation / cooperative?
116. Tragedy of the Commons
• Freedom in a commons brings ruins to all
• Common resources get used more than is
desirable from the standpoint of society as a
whole.
– Common resources tend to be used excessively
when individuals are not charged for their usage.
– Private cost understates true cost to the society
as more utilization makes less available for others
– This is similar to a negative externality.
COMMON RESOURCES
• Not excludable
• Rival in consumption
118. Some Important Common Resources
• Clean air and water
• Congested roads
• Fish, whales, and other wildlife
119. “The best things in life are free. . .”
• For both public goods and common resources
– no price
• Most goods in our economy are allocated in markets…
• When goods are available free of charge, the market
forces that normally allocate resources in our
economy are absent.
• When a good does not have a price attached to it,
private markets cannot ensure that the good is
produced and consumed in the proper amounts.
• In such cases, government or third sector can
potentially remedy the market failure that results, and
raise economic well-being
122. Interest of Organization and Group
• Common/group interest
– Higher wages
– Favorable legislation
– Higher price
– Better living standard
– State to further common interest of citizens
• Individual interest
– Others pay cost
– Reduction of effort/work
123. “A lobbing organization, or indeed a labour
union or any other organization, working in
the interest of a large group of firms or
workers in some industry, would get no
assistance from the rational, self-interested
individuals in the industry”
Then how large collective action is possible?
Will it lead to efficient outcome?
What to do to get efficient outcome?
125. Traditional Theory
• Casual Variant
– “instinct” or “tendency” to join group
• Formal Variant
– Human tendency & Functions best served
– “primitive groups”
• Small groups with face-to-face interaction
• Family, kinship groups
• Social expression of interest through class, caste, kin groups,
neighborhood groups
– Secondary groups
• Non-kinship groups
• Large association in modern society
• Labour unions, church, large business firms, universities, professional
societies
– Do large and small groups attract members in the same way?
126. Group and Individual
• Cost function of collective good is rising and
increasingly rises
• Significant initial or fixed cost
• Size / value of group
• Group action depends on individual actions and
individual actions depend on relative advantages
to them of alternative courses of action
– Maximize (individual gain – total cost of providing some
amt of collective good)
• There are members who would be better off if the
collective good were provided, even if they have
to pay the entire cost of providing it themselves,
than they would be if it were not provided
127. If there is some quantity of a collective good
that can be obtained at a cost sufficiently low
in relation to its benefit that some one person
in the relevant group would gain from
providing that good all by himself, then there
is some presumption that the collective good
will be provided
128. Results
• Condition for Collective good provision
(whether or not)
– Collective good would be provided if the gain to an
individual exceeds the cost
• Optimal Amount of Collective Good
– Marginal cost of additional units of collective goods
must be shared in exactly the same proportion as
the additional benefits
– Free ridings leads to provision of public good less
than Pareto optimal amount
129. Suboptimality
• Collective goods are non-excludable
• Sharing of cost by members
– Largest member would share disproportionately higher
burden of providing collective good
– Smaller members get the good free, so no incentive to
contribute
– Tendency for suboptimality
• Largest share small due to large number of participants
or small total benefit
– Serious problem of suboptimality
• Group composed
– Heterogeneous: less tendency for suboptimality
– Homogeneous: more tendency for suboptimality
• Institutional or procedural arrangement can lead to
Optimal outcome
131. Credit Market
• Some individuals willing to postpond some
consumption so that others can either
consume (with a consumption loan) or invest
(with investment loan)
• Individuals with best investment opportunity
are willing to pay highest interest rate
132. Problems of Credit Market
• Debtors are unable to repay
• Debtors are unwilling to repay
• Cost of enforcement high
• Lender reduces lending
• Market failure?
133. Imperfect Information and Market Failure
• The lender may not have information on
– Borrower’s reliability
– Borrower’s wiliness to use the fund wisely
• Lack of project appraisal in Developing countries
• Lack of credit bureau information
• Monitoring the borrower by lender is difficult and
costly
• Lender would lend smaller amount of loan
• Lower interest by credit rationing
– Small farmers excluded
• Lower investment in the economy as compared to
the situation when there is perfect information
• Market failure
134. Features of Rural Credit
• Scarce Collateral: Repayment problem
– Borrowers are too poor
– Poorly developed property right
Less supply of Credit
• Underdeveloped Complementary Institutions
– Insurance market
– Bureau to sanction delinquent borrowers
Less supply of Credit
• Covariant Risk and Segmented Market
– Lender’s portfolio of loans is concentrated on a group of individuals
facing common shocks to income
– Funds fail to flow across regions or groups of individuals
– Segmented market often depend on local moneylender
• Better information
• Lack s with respect to flow of fund
Chance of Pareto Improvement
• Enforcement Problem
– Unwilling to pay
– High cost of enforcement – political cost
– Poorly developed property right
135. Externality and Market Failure
• Market may fail even if we take into account imperfections
of information and enforcement
– Constrained Pareto efficiency
• Adverse selection
– Lenders do not know particular characteristics of borrowers
– Borrowers invest in risky projects
– Borrowers do not earn enough to repay
– If lenders charge high risk premium, high interest rate will
encourage risky projects and less chance of repayment, and
will exclude least risky projects
– Equal interest charged, externality of bad borrowers on good
borrowers
– Lenders may not charge higher interest rate rather would fix
interest rate and ration access to fund
• Lender would ask for collateral to identify the less risky borrower
• Collateral and foreclosure difficult
– Lending will be low from social point of view
136. Externality and Market Failure
• Moral Hazard
– Lenders unable to discern borrower’s action
– Borrower slacken their effort to make the project
successful or might change project
– Higher interest rate is counterproductive (reduce
incentive of payback)
– Credit rationing
– If funds taken from several lenders then monitoring
less
• Each lender prefers others undertake monitoring
• Terms of each loans may affect other lenders
– Negative externality
• Efficiency gains if borrowers deal with single lender
– Moral hazard leads externality to insurance market
137. Rural Moneylender
• Monopoly power
• Access to information
• Enforce repayment
• Monopoly may not be inefficient if it
discriminant monopoly
– But exploitative
139. Cooperative credit Societies Act 1904
• Run by rich landlords and money lenders
• Outcaste men won’t get loan unless they sell
labour to cast man at low wage rates
• Over dues in repayment
• Led to low productive investment and poverty
140. 1947-1969: Focus on Cooperation
• Farm input
• Crop production
• Processing
• Marketing
• Dairying, weaving and textiles
141. Cooperation failure
• Constantly looked up to the state for basic
functions
• Mutuality (savings and credit) missing; rather
borrower driven
• Dominance of rich and elite
• While originally visualised as member-driven,
democratic, self-governing, self-reliant
institutions, cooperatives constantly looked up
to the state for several basic functions
142. 20 years of Independent India
• Cooperatives remained dominated by rural
elites
• Bank continued to have an urban bias
143. 1969-1991: Nationalisation of Banks
• 1951, share of banks in rural credit less than 1
percent
• In 1969, 14 scheduled commercial banks were
nationalised
– branches in unbanked or under-banked rural and semi-
urban areas
• Rural credit as public good
– Critical to development of backward agrarian economy
– Finance rich farmers during green revolution
– Abrogate money lender, credit for green revolution
– Profit making in banking sets limit
144. 1961
•Census: 50% of India’s towns and almost none of the villages had banks
•Industry got disproportionate credit
1970
•RBI licensing policy; for every new branch in already served area, at least three branches in unbanked
rural or semi-urban area
1972
•Priority sector lending (33%); agriculture and allied activities and small-scale and cottage industries
•Ceiling on Interest rates – within priority sector
•By 1975 33% to priority sector
1976
•RRB – Small and marginal farmers, agriculture laborers, artisans and small entrepreneurs
1978
•RRB’s to charge flat 9% interest rate
1982
•NABARD – refinance to commercial banks, state cooperative banks, rural development banks, RRB
•Credit flow for agriculture, rural industries and allied activities in rural areas
•RBI ceiling for priority sector (9%)
146. Integrated Rural Development Programme
A tale of mindless bureaucratic programme to meet targets
• IRDP: Pilot study in 1978 and full in 1980
• Aim for income generating assets to rural poor
through cheap credit
• Better-off families selected/ corruption
• Little support for skill formation, access to input,
infrastructure
• High target of credit
• Millions of defaulters
• Cattle loans – no consideration of fodder avalibity
• 1989: official loan waiver
• Bank profit on decline
147. Narsimha committee 1991
Vibrant and competitive financial system
• Branch de-liscensing
• Interest deregulation
• Need, business potential and financial viability
• Number of branches in rural areas declined
– 196 RRB in 1990; 104 by 2006
• Share of short term loan and long term declined for
marginal farmers
• Rise of money lenders
• However, priority sector lending remained
• Slowdown of capital formation in agriculture leading to
food crisis
– Per capita foodgrain production fall
148. Government Intervention
• Redistribution
– Information problem about people and project
• Collateral
– Develop property right
– Land distribution
– Small farmers are rationed out of credit subsidy
• Enforcement/ foreclosure
– Rich farmers fail to repay, governemnt fail to foreclose
on agricultural loans
– Property right – limited possibility of transfer
• Improve codification of property rights
– Government backed credit schemes fail to sanction
delinquent borrowers
149. New Institutions
• Small Collective groups: information flow well
established
– Characteristics of individuals well known
– Monitoring borrower’s behavior may be relatively less
expensive
– Get rid of moral hazard and adverse selection
– Government intervention to overcome market
segmentation
• Social ties can act as social collateral instead of
physical collateral – social capital
• Enforcement problem can be dealt by local
sanctions
– Delinquent borrowers being debarred from village
ceremonies
• SHG for facilitating flow of funds across segments
150. Microfinance phase
• SHG-Bank linkage
– SHGs mainly for women
– Rules for monthly savings, lending, procedures, periodicity
meetings, penalties for default
– 15-20 members
– Inculcate banking habit
– Lesson in governance
• Teaches value of discipline both procedural and financial
– Exposure to interact with outer world
• SHG-Federation
– Bulk purchase of inputs (seeds, fertilizers)
– Marketing of outputs (crops, vegetables, etc.)
– Large loan for housing and health
152. Joint Liability Group
• Joint Liability Group (JLG) enables the members to
avail credit without collateral, purely on the
strength of peer partnership
• SHG is savings-led and JLG is credit led
• SHG demand driven JLG supply driven
• SHG takes 6 months to get loan
• JLG may get loan on the next week of its formation
• MFIs are engaged in formation of JLG
• Relatively non-poor members
• JLG can be formed from better-off SHG memebrs
• Emphasis on efficiency of delivery
155. Background
• Western UP
• Greatest beneficiaries of commercialisation
and new technologies were the capitalist
farmers and rich and middle peasant
• More agricultural surplus
• Government investment (irrigation )created
bias
– Western UP more developed
156. Charan Singh
• Charan Singh was the first politician in north India to
recognise potential of mobilising peasantry
– Formed Bharatiya Kranti Dal in 1967
– Leader Bharatiya Lok Dal in 1975
• Promoted the interest of rich and middle peasant belonging
to middle and backward caste
– Abolition of landlordism
– Consolidation of landholding
– Resistance to tax agricultural surplus
• Food procurement scheme (procurement and marketing) in
1967
– administered prices
• Death 1987 when rich peasants are getting economically and
politically stronger
– Created a vacuum
157. Bhartiya Kisan Union
• Formed by Charan Singh in 1978 but got resurrected in UP in 1987
– Leader Mahendra Singh Tikait
• Non political stance
• Farmer movement triggered by
– Power rates hike
– Erratic power supply
• BKU demands
– Remunerative prices
– Parity in power rates
– Lowering of input costs
• UP government provided concessions were more rhetorical than real
– BKU representatives included in statutory committee
• Movement in other parts of India
• Political threat to ruling party
158. Why farmers participated?
• Increasing aspiration frustrated by near
stagnation in agriculture
– Unfavourable terms-of-trade
• Make presence felt in rural areas where new
agrarian strategy increased income
• Cash crops (sugarcane etc) in UP suffered
159. Leadership by Rich Peasant
• Farmers’ movement used to protect and promote
interest of surplus producer who participate
actively in market to maximise economic returns
• Rich peasants appropriated a disproportionate
share of gains from public investment, higher
commodity prices and cheaper inputs
• Their interest in providing leadership to
movements is vital
• Leadership from affluent peasant, teachers,
former army officials and retired government
officials
160. Participation by Poor Peasant
• Mobilisation on the basis of primordial loyalties
• BKU failed to take into account the disparity
within farming community
– Poor peasants, agricultural labours and artisants not
benefitted by land reforms and green revolution
– BKU had no concern for minimum wage rate
• Failure to emerge as united for articulating
interest of all groups
163. The Idea of Critical Mass
• Formal theory of collective action treat only
one actor’s decision at a time
– Individuals make isolated decision (Olson)
– Extrapolate from the individual to group
– A small segment of population chooses to make
big contributions, majority do little
• Critical mass
164. Interdependence
• Individuals take into account the contribution
of others in making their own decisions about
contributing to a collective action
• Decisions are sequential rather than
simultaneous
• Contributions have positive or negative or no
effects on subsequent contributions
165. Production Functions
• Decreasing Marginal Returns to Contributions
– First few units of resources contributed have
bigger effect on the collective good and
subsequent contributions progressively less
r
P(r)
Decreasing
• Discrimination of Minority
community in Schools and
Building Society
– Media is sensitive to these
issues and organizations
fear actions
• Organizing a Picnic
166. Production Functions
• Increasing Marginal Returns
– Successive contributions generate more payoff
– Each contributions make the next one more likely
– Initial contributions of resources have only negligible
effects on collective good
– Only after long start-up costs have been made subsequent
contributions start to make a big difference
r
P(r)
• Environmental
Movement
• Movement against
corruption
• Movement by
politically
unimportant group
167.
168. Anti-Corruption Movement India: Lokpal Bill
• Pre 2011: Adarsh Housing Society Scam, Radia tapes
controversy,and the 2G spectrum scam
• April 2011: Hazare began a hunger strike on 5 April 2011 at Jantar
Mantar in Delhi
• Movement got momentum and many others began to join
• Joint committee formed with Pranab Mukherjee and Santi Bhusan
• June 2011: Ramdev joined
• August 2011: Discussion on Lokpal In parliament
• Hazare’s demand agreed by Parliament
– citizen charter
– lower bureaucracy to be under Lokpal through an appropriate
mechanism
– establishment of Lok Ayuktas in the states
• Lokayata lacks power in many states due to vested political interest
169. Assumptions
• Resource for Collective Action
– Assume resource is available
– A unit of resource has a constant cost k (constant)
that is same for all individual
• Each person know production function and
how much has been contributed by all other
group members at any given time
• People have standard of comparison for
– the cost of contributing a unit of resource
– the value of the collective good
170. Assumptions
• People try to maximize expected value of
decisions
• Dichotomous collective good
– Probability of provision is P
– P = P(r), r is total number of units of some resource
that has been contributed
• P(0) = 0
• P(R) = 1
• Production function increases monotonically and
is continuous and twice-differentiable
• Individual’s value or interest in the collective good
for everyone – V (constant)
171. One-Actor Case
• Assume good benefits one actor –private good
• Net payoff N(r) = VP(r) – kr
• Optimization: Ṕ́́́(r) = k/V (constant)
172. Homogeneous Group
• A complete homogeneous group
• All individuals attach the same value V to the
collective good
• All individuals have the same fixed but small
quantity of resource
• P depends not only on an individual’s own
contribution but also contribution by others
Heterogeneous Group
• Individual interest or resource different
173. Acclerating function
• Optimum: Ṕ́(r) = k/V
• P″(r) >0 – accelerating function
• Minimum: Ṕ́(r) = k/V
• If r is below minimum, each additional unit of contribution
produces another of loss
• If r is above minimum, each additional unit contribution produce
benefit
– But initial loss has to be overcome and so r needs to be sufficiently high
to make N(r) >0
• Huge resource needed to provide the good with certainty
• Homogeneous group: Collective good would not be provided
– Small contributions will not cross Minimum payoff
• Collective action will snowball beyond Minimum
– Draw more and more people
– Mass action once something starts
• “Optimum” is to provide the good with certainty, if one has the
resource to do so
174. Critical Mass
Accelerating
• If any action is forthcoming, it is the most
interested group members who will
contribute
• Less interested group would join the
bandwagon after the group has gathered
sufficient contribution
• They will stop contributing once maximum is
reached
175. Decelerating functions
• Optimum: Ṕ́(r) = k/V
• P″(r) <0 – decelerating function
• Maximum: Ṕ́(r) = k/V
– Homogenous group of small contributors produce same result as one actor
• Individuals should contribute sequentially until the maximum is
reached
– No individual should contribute any more
• Some collective action will occur, but provision of the good with
certainty (the maximum that could occur) is quite unlikely
• Small interest of members in collective good will make the good to be
delivered
• Free Riding: Most interested would pay, other’s won’t
– Normative reciprocity : contributors should rotate across actions
176. Decelerating
• Free-riding is likely but ride is short at optimum
• If no one contributes –no ride
• Actions by role model or organizer sets off other’s
actions
• Critical Mass:
– A small core of interested and resourceful person can
begin contribution towards an action
– Draws less interested or less resourceful members of the
population
– Reach maximum potential
178. Third order curves
• Two optimum solutions
– Minimum net payoff
– Maximum net payoff
• If the initial period of low returns is long then
homogeneous group would fail to act
collectively
179. Social Mobilization
Acclerating function
• Contractual solutions
– Organize, communicate and coordinate an explicit
or implicit contract
– Organisation and communication cost
• Idealistic organizer would
– bring people together
– Show their interest
180. Lok Sabha election 2019
Source: Centre for the Study of Developing Societies (CSDS), Delhi
181. Source: CMS (2019) ‘A CMS Report: Poll Expenditure, 2019 Elections’, CMS
Research House, New Delhi
182.
183.
184. Water and Sanitation Management Organization
(WASMO)
• Paradigm shift in the role of governance from provider to
facilitator and citizens engagement in drinking water
service delivery at users level in rural areas of Gujarat
• Strategy
– Creating institutions at the village level and strengthening them
through continuous capacity building
• Pani Samiti, which consists of 10-12 members, is constituted in Gram
Sabha to plan, implement, manage, own, operate and maintain village
water supply system
– Focus on IEC and software activities before taking up
development of infrastructure for water supply
• Interpersonal meetings
• Publications
• Fold Media, Audio Visual Material
– Putting entire programme in public domain for seeking strong
citizens' engagement
