Academic journal article Economic Inquiry

Efficient User Charges in a Rent-Seeking Model

Academic journal article Economic Inquiry

Efficient User Charges in a Rent-Seeking Model

Article excerpt

EFFICIENT USER CHARGES IN A RENT-SEEKING MODEL

This paper examines efficient user charges on governmentally provided facilities in the presence of rent seeking. We find that the efficient user charge depends upon the relative slopes of the demand curve for the use of the facility and the corresponding marginal cost curve, as well as the level of rent seeking over the revenue raised. Except for a special case, the efficient user charge is found to differ from the charge indicated by the intersection of demand and marginal cost curves. Examples show that actual user charges on government facilities are often set at inefficient levels.

I. INTRODUCTION

Governments control access to many services, facilities, and resources for which either no charge, or only a token charge, is imposed on users. Under the prompting of concerns over budgetary deficits and utilization efficiency, there is increased interest in user charges on a wide array of government facilities.(1) By placing charges on government facilities, or by increasing existing charges toward efficient levels, significant amounts of revenue can be raised and consumption decisions made more responsive to cost conditions.

This paper concentrates on the efficiency justification of user charges. In particular, the question of what is the efficient user charge to impose on access to an existing facility controlled by government is addressed. Abstracting from problems associated with incomplete information on the relevant demand and cost conditions, the answer to this question may seem obvious. The standard analysis indicates that the efficient price for a good, whether imposed by market forces or by government authorities, is determined by the intersection of the demand curve and the marginal cost curve. This answer is clearly correct in the case of market prices. However, the intersection of the demand and marginal cost curves will determine the efficient governmentally imposed user charge only if there are no efficiency-relevant differences between government prices and market prices. By recognizing a fundamental difference between government prices and market prices, the analysis in this paper qualifies the standard view on efficient user charges.

The distinction between government and market prices arises from the fact that a market price generates revenue that is privately owned, while a government price generates revenue that is commonly owned. The claimants of revenue from a market price are generally well-specified, as is the extent of their claims. This is not the case with revenue from a government price. Additional revenue raised by government typically goes into the general fund, which is then allocated among rival claimants through competition for political influence. Even when government revenues are earmarked, they are typically earmarked to a function where specific claimants are not well specified. Earmarking may reduce, but surely does not eliminate, the competition for political influence.(2)

Competition for political influence requires the use of real resources and, to a large extent, represents pure waste since it is primarily concerned with distributing existing wealth, rather than creating new wealth. This waste is referred to as a rent-seeking cost and has to be recognized as inextricably associated with government revenue. Although some of what is perceived as cost by rent seekers is, from a social perspective, a costless transfer, the fact remains that raising government revenue with a user charge will motivate socially costly rent seeking, and the amount of this cost will be positively related to the amount of revenue raised.(3)

One might argue that an increase in government revenue from a user charge may not result in additional rent-seeking cost, since total government revenue may remain constant as other charges or taxes are reduced. Even if this is the case, however, interest groups will compete to have their charges or taxes reduced. …

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