Alex Tabarrok
[W]here every man is enemy to every man…there is no
place for industry, because the fruit thereof is uncertain,
and consequently no culture of the earth, no navigation
nor use of the commodities that may be imported by sea,
no commodious building…no knowledge of the face of the
earth; no account of time, no arts, no letters, no society,
and, which is worst of all, continual fear and danger of
violent death, and the life of man solitary, poor, nasty,
brutish, and short.
Thomas Hobbes, Leviathan, XIII.9
Government
but burns
is like
your
fire.house
It keeps
down
youwhen
warmnot
when
contained.
contained
If men were angels, no government
would be necessary…In framing a
government which is to be administered
by men over men, the great difficulty
lies in this: you must first enable the
government to control the governed;
and in the next place oblige it to
control itself.
James Madison, Federalist 51
James Madison

A constitution is a set of explicit or implicit rules which govern
how individuals choose and interact.
 The constitution is the framework, the rules, that govern how the
game is played.

Choice over the rules of the game can be quite different than
choice within the game because the rules will govern many
actions far into the future.
 Choosing rules is more like choosing from behind a “veil of
ignorance.”
When will a society of free and rational utility maximizing
individuals choose to undertake action collectively rather than
privately?
Buchanan and Tullock, Calculus of Consent, p.43
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Buchanan and Tullock are asking a hypothetical question. Under
idealized conditions when will a group of free, rational and equal
individuals choose to undertake action collectively.
B and T. take as a given that such individuals will want to have at least a
minimal or laissez-faire state. i.e. a state that enforces property rights,
protects against theft and assault etc.
Given this baseline of a minimal-state when would, free, rational, and
equal individuals want to expand the state further?
The answer is when the state can deal with public good and externality
problems at lower cost than would individual private action or
voluntary collective action.
It will be key to the theory to understand that government action has
costs that must be taken into account in a rational calculus.
Let’s review public goods and externalities.
 Why do private firms
rarely put on fireworks
displays for a profit?
 What company is the
notable exception to this
rule? Why?
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Consider Einstein’s theory of
relativity. It is:
 non-rivalrous and
 difficult to exclude nonpayers.
Some ideas for products may
be patented, copyrighted or
trademarked but not all.
Basic research may, therefore,
be underprovided in a free
market.
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An externality is said to exist when A’s actions have a direct effect
on B’s utility function or production function. Externalities may be
negative or positive.
Negative Externalities
1.
2.
3.

Your neighbor contracts Avian Flu and coughs all over you.
The winds send acid rain from the United State northwards over the
border and into Canada.
A and B pump oil out of the same reservoir – the more oil A pumps the
deeper B must drill and vice-versa (a negative production externality)
Positive Externalities
1. Your neighbor has his children vaccinated.
2. A farmer crop dusts on a windy day (assuming his neighbors are not
organic farmers! – Negative and positive externalities are in the eye of the
beholder!)
3. Apple and HP both locate in Silicon Valley thereby creating a larger worker
force that each can draw upon – called a positive agglomeration
externality.
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When A chooses to take the highway
he slows everyone else down.
Assume that A saves 5 minutes by
taking the highway and slows one
thousand drivers by just 6 six seconds
each.
Gain to A: 5 minutes
Loss to everyone else: 100 minutes.
Loss/Gain=20!
But does A take into account
everyone else’s losses?
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Forcing people to pay to provide public
goods can make them better off!
No one likes to pay taxes but if the choices
are
1. No one must pay, therefore, most people don’t
and a neighboring country invades.
or
2. Everyone must pay and the neighboring country
does not invade.
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Then coercion may be better than
voluntarism. I am willing to be coerced so
long as everyone else is coerced also.
I Authorize and give up my Right of
Governing my selfe, to this Man . . .
on this condition, that thou give up
thy Right to him . . . This done, the
Multitude so united in one Person,
is called a COMMON-WEALTH . . .
This is the Generation of the great
LEVIATHAN.
Thomas Hobbes, Leviathan, Ch.17
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A typical econ course would have stopped at the previous
slide but Buchanan and Tullock wisely note that collective
action/government has costs as well as benefits.
First, there are costs of organizing collective action
(bargaining costs, transaction costs, voting costs etc.)
Second, government action by its very nature creates
externalities. If the government votes 51 to 49 to tax the 49 to
benefit the 51 a negative externality has been created! i.e.
there can be forced riders as well as free riders.
Thus, we need to compare three alternatives:
Alternative
Cost
A – Do Nothing
Live with the externality or underprovision of the public good.
B – Voluntary Collective Action
Decision making and organization costs and perhaps not all of
the problem will be solved voluntary so some externality and
underprovision costs will remain.
G – Government/Politics/Coercive
Collective Action
Decision making and organization costs and the cost of being
in the minority – forced riders, corruption, political externality
costs.
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When is doing nothing the optimal choice?
Many externalities should remain private by
triviality.
Consider the ugly shirt. Do we want the
aesthetic externality created by clothing to
be solved by government, or should we try
to solve the ugly shirt problem by voluntary
collective action or just let it go?
The costs of organizing are usually too high
to justify either voluntary or collective
intervention.
Dress codes, however, are sometimes used.
But other externalities are private because they are too
important to leave to collective action.
 Consider the choice of whom to marry, whether and
how many children to have, what thoughts to believe.
All of these involve extensive public good and
externality problems but do we want them “solved” by
collective action? Why not?
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In 1924, Virginia passed a compulsory sterilization law for the mentally
retarded "for the protection and health of the state.”
 The law was challenged and went to the Supreme Court where Oliver
Wendell Holmes the greatest juror of his time and still revered today
said:
 “It is better for all the world, if instead of waiting to execute
degenerate offspring for crime, or to let them starve for their
imbecility, society can prevent those who are manifestly unfit from
continuing their kind. The principle that sustains compulsory
vaccination is broad enough to cover cutting the Fallopian
tubes...Three generations of imbeciles are enough.”
 Thousands of Americans were sterilized. The last case in Virginia
occurred in 1972. The law was repealed in 1974.
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“The principle that sustains compulsory vaccination is broad
enough to cover cutting the Fallopian tubes.” O.W. Holmes,
Buck v. Bell, 1927.
The principle Holmes is talking about is the externality
argument. Doesn’t sound so good now does it?
Why do we reject the externality argument in some contexts?
The argument can certainly lead to a violation of individual
rights – a moral constraint.
But there is another problem. The choice to bear or not bear a
child is so important that we don’t want that choice to be
made collectively – the potential for abuse is too high for a
free and rational individual to want to make that choice a
collective decision.

Carrie Buck’s case illustrates the
potential for abuse.
 Holmes’s dictum about three
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Vivian Buck being “diagnosed” for
feeblemindedness.
generations of imbeciles was not
accidental. To show that the
“defect” was inherited the court
argued that Carrie’s mother was an
imbecile and so was Vivian her
daughter.
Vivian was “diagnosed” as an
imbecile at 7 months of age.
Vivian died at age eight – she had
been on the school honor role more
than once.
Carrie lived until 1983, she was by
all accounts of normal intelligence.
Carrie’s sister, Dorris, was also
sterilized without her consent or
knowledge.
Carrie Buck. Sterilized in 1927
without her knowledge by the
State of Virginia.
 Since Carrie Buck was neither feeble-minded nor epileptic
why was she committed to the State Colony for Epileptics
and Feeble-Minded?
 “[Carrie] was apparently raped by a relative of her foster
parents, then blamed for her resultant pregnancy. Almost
surely, she was (as they used to say) committed to hide her
shame (and her rapist's identity), not because enlightened
science had just discovered her true mental status. In short,
she was sent away to have her baby. Her case never was
about mental deficiency; it was always a matter of sexual
morality and social deviance.”
 Stephen Jay Gould, in “Carrie Buck’s Daughter”.
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Other externality/public good problems.
1. What color to paint your house?
2. Where can you build a factory?
3. Bridge and road building?
4. Charity
The best way to solve problems like this may be voluntary collective
action – in between letting it be and government action.
Bridges may be financed by tolls – there is some loss of static
efficiency but bridges may be better located when privately built than
when publicly built (Coase and the marginal cost controversy).
Much charity is provided by voluntary collective action. Is it enough?
Large scale development and contract can handle issues such as
restrictions on the color you paint your house.
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Costs of underprovision are
potentially large.
Voluntary collective action very
difficult.
Collective coercive decision
making may be best.
But are we really buying national
defense?
Externalities and public good problems are not sufficient to justify
government action.
 Government action has its own costs – decision-making costs and the
costs of being coerced if you are in the minority.
 To justify coercive collective action we must show that the cost of
dealing with public good and externality problems via government is
less than the cost of dealing with them in alternative ways.
▪ Aside: Externalities and public good problems are not necessary to
justify government action either. Suppose that through a long
process of bargaining we were able to provide the efficient level of
national defense – i.e. no underprovision. Government could still
be justified, however, if coercive collection action could solve the
problem more cheaply.
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So far we have only talked about the cost of collective
action (decision makings costs and coercive externality
costs) in general terms. It should be clear, however,
that this costs will differ depending on how
government is organized and run.
 Collective action costs, for example, will be different
if majority rules than if say there is a 2/3rds or
unanimity rule.
 Chapter Six in the Calculus of Consent takes up this
issue in greater depth.