Political Equilibrium and the Provision of Public Goods

This paper treats interest groups – peoplein their role as consumers of a public goodand people in their role as taxpayers – asthe unit of account for representativevoting. Each group is allowed to make aneffort to support its preferred candidateand, at the margin, the effort-benefitratio is the political price the group iswilling to pay to secure an additionaldollar of benefits.

Under reasonable assumptions, a uniqueequilibrium is assured and itscharacteristics are quite intuitive. Inparticular, the marginal political benefit(from consumers) of the last unit of outputmust equal the marginal political cost(from taxpayers). Alternatively, the rateat which the politician can transformtaxpayer income into consumer surplus mustequal the ratio of their political prices. The result will be optimal only on the rareoccasion when the effort-benefit ratios ofthe two groups are equal.

Since political goals are themselves ``public goods'' for thetwo interest groups,they face all the normal free riderproblems. Moreover, even small differencesin the effort-benefit ratios of the twogroups lead to large welfare losses.

How bad can things get? Each group has anincentive to try to overcome free-riderproblems and divert resources from privatesector activities to politics. And anyincrease in political effort is alwaysrewarded. However, (1) the marginal returnis always higher for the group with thesmaller effort-benefit ratio; (2) thedifferential return between the two groupsgrows the further we stray from optimality;and (3) both groups face diminishingreturns. These incentives may act asnatural checks on political outcomes –placing some limit on the amount of wasteand inefficiency democracy is likely toproduce.

The influence of a producer (of the publicgood) group that collects a rent increasesthe likelihood that public goods will beoverproduced. In fact, it is conceivableto have a good with no value to consumersproduced, solely because of the influenceof producers. Comparative static analysisreveal that the political system willrespond to changes in market conditions ina way similar to economic markets. Themagnitude of these shifts differs fromeconomic markets, however. For goods thatare being overproduced, the politicalmarketplace overresponds to changes indemand and underresponds to changes incosts. The converse is true for goods thatare being underproduced.