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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.

Suggested Citation

  • DE BORGER, Bruno & PROOST, Stef, 2013. "The political economy of pricing and capacity decisions for congestible local public goods in a federal state," Working Papers 2013020, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2013020
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    Cited by:

    1. De Borger, Bruno & Proost, Stef, 2016. "Can we leave road pricing to the regions? -The role of institutional constraints," Regional Science and Urban Economics, Elsevier, vol. 60(C), pages 208-222.
    2. De Borger, Bruno & Proost, Stef, 2015. "The political economy of public transport pricing and supply decisions," Economics of Transportation, Elsevier, vol. 4(1), pages 95-109.
    3. repec:bla:presci:v:96:y:2017:i:2:p:401-422 is not listed on IDEAS
    4. Edward L. Glaeser & Giacomo A.M. Ponzetto, 2017. "The Political Economy of Transportation Investment," NBER Working Papers 23686, National Bureau of Economic Research, Inc.
    5. Stef Proost & Jonas Westin, 2017. "Race to the top in traffic calming," Papers in Regional Science, Wiley Blackwell, vol. 96(2), pages 401-422, June.
    6. Brueckner, Jan K., 2014. "Cordon tolling in a city with congested bridges," Economics of Transportation, Elsevier, vol. 3(4), pages 235-242.
    7. repec:eee:juecon:v:101:y:2017:i:c:p:45-56 is not listed on IDEAS
    8. Fung, Chau Man & Proost, Stef, 2017. "Can we decentralize transport taxes and infrastructure supply?," Economics of Transportation, Elsevier, vol. 9(C), pages 1-19.

    More about this item

    Keywords

    Congestible local public goods; Pricing; Capacity decisions; Fiscal federalism;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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