[MUSIC] In many cases, social norms emerge when private actions create externalities, that is when action has a positive or negative impact on others. An externality is defined as a loss or gain in the welfare of one party resulting from the activity of another party, without the possibility of compensation. Externalities are associated with public goods. Think of a positive externalities such as getting a basic education level. Not only the educated individual's benefits are met, all society is better off with an educated population. However, private individuals do not have any incentive to buy a socially optimal level of education. A typical example of a negative externality is pollution. Society would benefit from reduced pollution levels. However, it is not in a factory owner's interest to reduce pollution. Or think of residents of American ghettos that live in a very unsafe environment. Crime effects all and all residents share an interest in safer streets. But there is no incentive for an individual to act alone to control crime. In all these cases, there is a divergence between individual and collective interest. If left to individuals, no public goods will ever be provided. Market solution may fail because the cost of bargaining and reaching agreements may be extremely high. For example, a factory may find it impossible to negotiate directly with all the citizens that are affected by its pollutants. Government solution may fail because of inefficient production and wasteful spending. In many cases, social norms that regulate behavior emerge as a cheaper solution to the problem of providing public goods. Especially, in those cases in which we face negative externalities. To understand how a norm solves a tension between individual and collective interest by providing a public good, think of a norm that many of us take for granted, the norm of reciprocity. High levels of reciprocity clearly benefits society as they allow trust to flourish and therefore, facilitate all sort of exchanges. Yet, there are often individually incentives not to pay back or return favors, especially, if one does not expect the relationship to continue. When such tensions between individual and collective interests exist, norms tend to emerge. They provide us with a legitimate claim to collectively beneficial behavior and authorize the punishment of transgressions. In the case of reciprocity, lack of reciprocation is taken very seriously and is socially penalized. The person will be ostracized and risk a huge reputation of cost. After all, who wants to deal with a non-reciprocater? Normal reciprocity creates the condition for social trust to flourish, it creates a public good. Let me give you an example of negative externality you know very well. Open defecation. Sanitation, or the lack of it, is a public health issue and people are affected by their neighbors and their community sanitation status as well as their own. The cost of open defecation are felt throughout the community. The use of latrines is a public good. Everyone benefits from improved sanitation but again, there is a tension between individual and collective interest. We face a collective action problem. Let me illustrate the two types of collective action problems that social norms cancelled, social dilemmas and tragedies of the commons. A social dilemma is a situation in which what is in the best interest of each individual makes the collective, the group to which the individual belongs worse off. Open defecation, we have seen, is a custom. It serves a need relatively well. It is simple and it is convenient. It costs less, one does not have to spend money building a latrine and effort keeping it clean. But open defecation is bad for the community. Soil and water get polluted, diseases spread much more rapidly. Here people face a social dilemma. Note that even if many community members or even the majority of community members were to use a latrine, there would still be an individual temptation to free ride and continue defecating in the open. A tragedy of the commons, instead, is a situation in which many individuals acting independently, deplete a shared limited resource, when it is in everyone's long-term interest to conserve it. An example is unregulated groundwater extraction that depletes water supply. Here again, if a majority of the population conserves water, there is an individual temptation to free ride and keep consuming, using as much water as one needs. How can we induce behavioral change? Often, it is felt that a good solution is to provide subsidies, monetaries or in kind. However, we know that in developing countries, the provision of latrines, or of vouchers to buy the necessary materials,to build a latrine, did not per se motivate people to use them. In fact, often latrines have been used for other purposes. Two examples here show, some preferred use of subsidized latrines. In one case, we see loaves of bread piled up. The latrine is used as a storage pantry. In the other case, wood is piled up. The latrine has become a deposit. You see that people become quite creative in their use of latrines that are put to a variety of purposes but to the one they were meant for. When purely monetary incentives are used in sanitation, we know that in general, they do not work. >> Historically sanitation programs would distribute latrines, people would receive bowls whether they wanted it or not. >> Most of the time, it didn't result in use. They became flower pots, or in one case, I've even seen it used as a rice bin. These programs didn't give people choice. They didn't create collective understanding and impact of such practice. Worse, people weren't given an opportunity to change on their own. There is no agency, no autonomy. >> I think our work to target the hardware only will never work because they're supply driven, they are not demand driven. If you simply come and plant, I'm using the word deliberately, you come and plant a toilet in a household and you expect that, I won't use it. You are not going to succeed. Showed that even programs where they subsidize households with latrines, they're also not being successful because there's no real motivation. There's no real emotions for people to identify themselves with the facility and see the actual benefit and therefore, they're able to replace it. In one country, which I don't want to name, you had very huge marketing and subsidy of the program, and had it work there. Once the subsidy program ran out, when then latrines filled up, people removed the roofing materials and I talked to them. They said they were waiting for another round of subsidies for the government to construct for us another latrine. So supply of latrines doesn't work. >> In the another lecture, I will discuss the specific conditions under which monetary incentive can endure. Here, let me just highlight the fact that the issue is not just building a latrine, but using it consistently and keeping it clean and functioning. All life-long activities. As we shall see in the next lectures, norm creation in this case, successfully and cost effectively solves the collective action problem.
