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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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  • Bruno DE BORGER
  • Stefan PROOST

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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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces13.16.

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Date of creation: Sep 2013
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Handle: RePEc:ete:ceswps:ces13.16

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  1. De Borger, Bruno & Proost, Stef, 2012. "A political economy model of road pricing," Journal of Urban Economics, Elsevier, vol. 71(1), pages 79-92.
  2. Calthrop, Edward & De Borger, Bruno & Proost, Stef, 2010. "Cost-benefit analysis of transport investments in distorted economies," Transportation Research Part B: Methodological, Elsevier, vol. 44(7), pages 850-869, August.
  3. De Borger, B. & Dunkerley, F. & Proost, S., 2007. "Strategic investment and pricing decisions in a congested transport corridor," Journal of Urban Economics, Elsevier, vol. 62(2), pages 294-316, September.
  4. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
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  7. Russo, Antonio, 2012. "Voting on Road Congestion Policy," TSE Working Papers 12-310, Toulouse School of Economics (TSE), revised Nov 2012.
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  11. Jan K. Brueckner & Harris SELOD, 2006. "The political economy of urban transport-system choice," Working Papers 10220, Institut National de la Recherche Agronomique, France.
  12. 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.
  13. King, David & Manville, Michael & Shoup, Donald, 2007. "The political calculus of congestion pricing," Transport Policy, Elsevier, vol. 14(2), pages 111-123, March.
  14. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  15. Ross Hickey, 2013. "Bicameral bargaining and federation formation," Public Choice, Springer, vol. 154(3), pages 217-241, March.
  16. 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.
  17. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  18. 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.
  19. 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.
  20. Marcucci, Edoardo & Marini, Marco, 2005. "Road pricing as a citizen-candidate game," MPRA Paper 29293, University Library of Munich, Germany.
  21. Feng Xie & David Levinson, 2009. "Governance choice on a serial network," Working Papers 200904, University of Minnesota: Nexus Research Group.
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