Question

For each of the following conditions, determine. whether a collective-action problem exists. \(\left[\mathrm{LO}_{22.4}\right]\) a. Diffuse benefits, diffuse costs. b. Diffuse benefits, concentrated costs. c. Concentrated benefits, diffuse costs. d. Concentrated benefits, concentrated costs.

Short answer

Collective-action problems exist in situations a and b.

Step-by-step solution

Understanding Collective Action Problem

A collective-action problem occurs when a group would benefit from working together but there are obstacles that prevent them from doing so. Typically, when benefits or costs are diffuse, they are spread out across many people, making collective action less likely. Conversely, when benefits or costs are concentrated, they are limited to a smaller group, potentially making it easier or more compelling for people to work together.

Analyzing Situation A: Diffuse Benefits, Diffuse Costs

When both benefits and costs are diffuse, it becomes very challenging to organize any collective action. The widespread nature of the benefits and costs means that each individual's contribution or gain appears insignificant, leading to free-rider problems.

Analyzing Situation B: Diffuse Benefits, Concentrated Costs

Here, those who bear the concentrated costs have a strong incentive to organize and oppose, while those who would benefit often do not act because the benefits are minimal for any individual. This setup is prone to a collective-action problem, as beneficiaries may not effectively mobilize, while cost-bearers are likely to organize against the action.

Analyzing Situation C: Concentrated Benefits, Diffuse Costs

In this case, those who receive concentrated benefits have a high incentive to organize, as they gain significantly. Diffuse costs make it less likely for cost-bearers to organize in opposition, since each individual's share of the costs is small. Thus, no significant collective-action problem exists for the beneficiaries who can easily organize.

Analyzing Situation D: Concentrated Benefits, Concentrated Costs

Both beneficiaries and cost-bearers have strong incentives to organize because both benefits and costs are concentrated. Normally, each group can effectively mobilize, reducing the likelihood of a collective-action problem due to strong incentives on both sides.

Key concepts

Diffuse Costs

Diffuse costs mean that expenses or burdens are spread out over a large number of people. This can make it harder for individuals to notice or get concerned because each person only bears a tiny part of the burden.
When costs are diffuse, individual contributions or sacrifices seem so trivial that people might not feel compelled to take action against them.
For example, if a government raises a small additional tax on everyone to fund an unpopular project, each person's tax increase might be so small that organizing a protest doesn't seem worth the effort.
In the context of a collective-action problem, diffuse costs are significant because they often lead to what is known as the "free-rider problem". People might assume someone else will address the small cost, leading to inaction and making it less likely that anyone will organize to oppose the cost.
This phenomenon challenges effectively mobilizing people against broadly spread costs, making diffuse costs a key consideration in understanding why collective action can falter.

Concentrated Benefits

Concentrated benefits occur when the positive outcomes or rewards of an action or decision are received by a small group. This group tends to organize more easily and effectively because they have a lot to gain.
The promise of a significant benefit motivates them to take action and advocate for policies or projects that serve their interests.
An example might be a company that lobbies for government subsidies. Although the majority covers the subsidies, the company benefits directly and significantly.
Concentrated benefits are crucial in the context of collective-action problems. This is because those who stand to gain tend to have higher incentives to organize and push for their cause, which can make their voices more dominant in policymaking.

• They may spend time and resources to lobby decision-makers.
• They can form coalitions to support their cause.
• They often have more visibility and power compared to the dispersed who are affected by costs.

In summary, concentrated benefits provide strong motivation for collective action among beneficiaries, influencing how policies and projects are implemented.

Free-rider Problem

The free-rider problem is a common issue in collective action, where individuals benefit from resources or services without contributing to the cost or effort of providing them. It comes into play when people can enjoy the benefits of a public good or service without having to help fund it.
For example, when a new park is built through public funding, everyone can enjoy the park, even those who didn't pay taxes for its construction.
Knowing that they can likely benefit without participating can lead to individuals opting out of the effort to fund or maintain it.
In scenarios where contributions are voluntary, the free-rider problem can cause the collective effort to collapse, as more people choose not to pitch in, expecting others to do so. This problem is exacerbated when costs are diffuse, as discussed earlier, because individual incentives to act are minimized.
The free-rider problem highlights the challenge of motivating people to contribute to collective efforts when they can benefit without contributing.