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The political economy of pricing and capacity decisions for congestible local public goods in a federal state

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  • DE BORGER, Bruno
  • PROOST, Stef

Abstract

This paper studies the political economy of pricing and investment for excludable and congestible public goods in a federal state. Currently, we observe a wide variety of practices, ranging from federal gasoline taxes and road investment to the local supply of -- and sometimes free access to -- libraries, parking spaces and public swimming pools. The two-region model we develop allows for spill-overs between regions, it takes into account congestion, and it captures both heterogeneity between and within regions. Regional decisions are taken by majority voting; decisions at the federal level are taken either according to the principle of a minimum winning coalition or through cooperative bargaining. We have the following results. First, when users form the majority in at least one region, decentralized decision making performs certainly better than centralized decision making if spill-overs are not too large. Centralized decisions may yield higher welfare than decentralization only if users have a large majority and the infrastructure in a given region is intensively used by both local and outside users. Second, if non-users form a majority in both regions, centralized and decentralized decision making yield the same socially undesirable outcome, with prices that are much too high. Third, both bargaining and imposing uniform price restrictions across regions improve the performance of centralized decisions. Fourth, the performance of decentralized supply is strongly enhanced by local self-financing rules; it prevents potential exploitation of users within regions. Self-financing rules at the central level are not necessarily welfare-improving. Finally, the results of this paper contribute to a better understanding of actual policy-making.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2013020.

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Length: 77 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:ant:wpaper:2013020

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Keywords: Congestible local public goods; Pricing; Capacity decisions; Fiscal federalism;

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  1. De Borger B. & Dunkerley F. & Proost S., 2006. "Strategic investment and pricing decisions in a congested transport corridor," Working Papers 2006021, University of Antwerp, Faculty of Applied Economics.
  2. Barry Ubbels & Erik Verhoef, 2006. "Governmental Competition in Road Charging and Capacity Choice," Tinbergen Institute Discussion Papers 06-036/3, Tinbergen Institute, revised 10 Sep 2007.
  3. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
  4. Marcucci, Edoardo & Marini, Marco A. & Ticchi, Davide, 2005. "Road pricing as a citizen-candidate game," European Transport \ Trasporti Europei, ISTIEE, Institute for the Study of Transport within the European Economic Integration, issue 31, pages 28-45.
  5. De Borger, Bruno & Proost, Stef, 2012. "A political economy model of road pricing," Journal of Urban Economics, Elsevier, vol. 71(1), pages 79-92.
  6. Edward Calthrop & Bruno De Borger & Stef Proost, 2008. "Cost-benefit analysis of transport investments in distorted economies," Center for Economic Studies - Discussion papers ces0818, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  7. Ross Hickey, 2013. "Bicameral bargaining and federation formation," Public Choice, Springer, vol. 154(3), pages 217-241, March.
  8. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  9. Russo, Antonio, 2013. "Voting on road congestion policy," Regional Science and Urban Economics, Elsevier, vol. 43(5), pages 707-724.
  10. Knight, Brian, 2004. "Parochial interests and the centralized provision of local public goods: evidence from congressional voting on transportation projects," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 845-866, March.
  11. Feng Xie & David Levinson, 2009. "Governance choice on a serial network," Public Choice, Springer, vol. 141(1), pages 189-212, October.
  12. King, David & Manville, Michael & Shoup, Donald, 2007. "The political calculus of congestion pricing," University of California Transportation Center, Working Papers qt9js9z8gz, University of California Transportation Center.
  13. Hulten, Charles R. & Schwab, Robert M., 1997. "A fiscal federalism approach to infrastructure policy," Regional Science and Urban Economics, Elsevier, vol. 27(2), pages 139-159, April.
  14. Craig, Steven G., 1987. "The impact of congestion on local public good production," Journal of Public Economics, Elsevier, vol. 32(3), pages 331-353, April.
  15. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  16. Brueckner, Jan K. & Selod, Harris, 2006. "The political economy of urban transport-system choice," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 983-1005, August.
  17. John William Hatfield & Gerard Padró i Miquel, 2012. "A Political Economy Theory Of Partial Decentralization," Journal of the European Economic Association, European Economic Association, vol. 10(3), pages 605-633, 05.
  18. King, David & Manville, Michael & Shoup, Donald, 2007. "The political calculus of congestion pricing," Transport Policy, Elsevier, vol. 14(2), pages 111-123, March.
  19. Jan K. Brueckner, 2013. "Efficiency of Decentralized Road Investment and Pricing in a Multi-Jurisdictional City with Spillovers," CESifo Working Paper Series 4384, CESifo Group Munich.
  20. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
  21. Hansjörg Blöchliger, 2008. "Market Mechanisms in Public Service Provision," OECD Economics Department Working Papers 626, OECD Publishing.
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