Managerial Economics, Business and Politics (29043018)
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MEBP Lecture 2 on public politics I ()
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Course
Managerial Economics, Business and Politics (29043018)
Institution
Universiteit Leiden (UL)
In this detailed summary you can find the notes of the second lecture of Managerial economics, business and politics: supply and demand for nonmarket action, the nature of political competition (free-riding and collective action), and strategy formulation
Managerial Economics, Business and Politics (29043018)
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Lecture 2: Public Institutions
Part I: Supply and Demand for Non-Market Action
Public politics is about the competition among interests in the arenas of government
institutions.
The approach we take is structured pluralism:
Nonmarket actions are taken by diverse, pluralistic interests in the context of
government institutions.
They determine the outcomes of nonmarket issues characterised by public politics.
Figure 1. Structured Pluralism
Interests
There are two uses of the word ‘interests’:
1. Interests as actors (e.g. interest groups).
2. Interests as stakes of the actors, which provide incentives for nonmarket action.
a. They may be distributive or moral.
b. Distributive politics = the spreading of benefits across different areas, interests,
and constituencies in one piece of legislation.
Interest groups:
Are formed among individuals and organisations with aligned interests.
There is a necessary condition for the formation of an interest group benefits from
collective action must exceed the costs of organisation.
Organise around a single issue.
, Be organised by:
o A political entrepreneur who mobilises the common interests of dispersed
individuals;
o A trade association that represents firms in an industry;
o A labour union that represents the interests of workers.
Have aligned interests that lead them to act in parallel rather than jointly.
Be successful in establishing an agency through which interests can be served.
The amount of nonmarket action
Will interests take political action? When and why?
Structured pluralism argues that a principal driver of public policies is the nonmarket action
taken by interests.
This nonmarket action includes:
Lobbying
Grassroots and other forms of constituent activity
Research and testimony
Electoral support
Public advocacy
Supply-and-Demand Framework
To assess the amount/quantity of nonmarket action, we use the supply-and-demand
framework.
The DEMAND for nonmarket action is characterised by three factors:
1. Aggregate benefits to the interests on one side of the issue combined total benefits
available to an interest and their beneficiaries.
a. If there is a large aggregate benefit, interests are more likely to get organised
and take action.
b. E.g., the Sugar Regime in the EU established that farmers and sugar producers
should get a minimum price for the sugar they introduced. The price for this
regime was 8€ per person in the EU (it costs us 8€ per person). This, multiplied
by the EU population, results in €4billion for the sugar industry for having this
, sugar regime this a lot of aggregate benefit. If the aggregate benefit is large,
interests are more likely to get organised and take action to support the sugar
regime.
2. Per capita benefits for an individual interest, such as a taxpayer firm or union how
much per individual actor do you gain from a political action?
a. There are not many sugar producers in the EU which means that, if we divide
the €4 billion of aggregate benefits by the small number of sugar companies,
the per capita benefit is still very large. So we can predict that individual sugar
companies have an incentive to take political action.
b. OF those groups that may oppose the sugar regime, the consumers clearly
oppose it but, individually, we only pay €8 which is not a lot. This means that
the benefit of not having the sugar regime is only €8. Individuals will probably
not take political action to only save €8.
3. Substitutes: alternative means for achieving the benefits. The benefits from nonmarket
action are lower when there are substitutes. If you offer substitute alternatives to the
interests on the other side, this might lower their benefit from taking market action.
a. Who is opposed to the sugar regime aside from consumers regime? Soft-drinks
industry because they use a lot of sugar which means they’ll have to pay a higher
price for sugar.
i. What if the sugar companies give a substitute to soft-drinks companies,
e.g. shift from sugar to corn syrup, which is a cheap substitute for sugar?
ii. The benefit to take non-market action against the sugar regime is smaller
because there is a substitute.
The COST of nonmarket action has three components:
1. Costs of organising for collective action free-rider problem.
2. Direct costs of undertaking nonmarket action.
3. Effectiveness of nonmarket action, which depends on:
a. Size of the interest group
b. Coverage of legislative districts, and
c. Financial resources.
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