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International Tax and Public Finance

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01-04-2013

Endogenous free riding and the decentralized user-fee financing of spillover goods in a n-region economy

Authors: Clemens Fuest, Martin Kolmar

Published in: International Tax and Public Finance | Issue 2/2013

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Abstract

The paper analyzes the strategic effects of decentralized user-fee and enforcement policies for the financing of interregional spillover goods. We derive the equilibrium pricing and enforcement rules for a n-region economy. We show that under mild conditions on the pattern of substitution between spillover goods and contrary to the 2-region case, the decentralized equilibrium cannot be Pareto improved by coordinated policy changes. However, decentralized equilibria are suboptimal from the point of view of utilitarian welfare. We characterize the direction of the distortion for this case. The regions’ incentives for user-fee enforcement are ambiguous in general. With only two regions and if regions only charge non-residents, however, there is overinvestment in user-fee enforcement in the decentralized equilibrium. For the case of a Tullock enforcement function and linear demand for the spillover goods we show that welfare is u-shaped in a parameter that measures the technological advantage of user-fee enforcement.

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Available only for authorised users

See Oates (1999) for a comprehensive survey of the literature.

See the official homepage of the ministry, http://www.bmvbs.de/Verkehr/-,1430/Strasse.htm, for further information.

http://www.sueddeutsche.de/X5q382/4053084/Koalition-uneins-ueber-Pkw-Maut.html.

http://www.faz.net/s/Rub0E9EEF84AC1E4A389A8DC6C23161FE44/Doc~ED9945D97BF70466B95337AB1485506DB~ATpl~Ecommon~Scontent.html.

A comparison can be found at http://www.studyineurope.eu/tuition-fees.

http://education.guardian.co.uk/students/internationalstudents/page/0,,1941450,00.html.

http://www.guardian.co.uk/education/2011/feb/06/univerisites-fee-charge-students.

http://www.crus.ch/information-programme/studieren-in-der-schweiz.html#8_Kosten.

For exemptions from this rule see Clotfelter (1977, 1978) and Laux-Mieselbach (1988).

The literature on contests has recently been surveyed by Corchón (2007), Garfinkel and Skaperdas (2007), and Konrad (2009).

An axiomatic foundation for the Tullock function for group contests can be found in Skaperdas (1996). An interpretation of the Tullock contest as a perfectly discriminatory noisy ranking contest can be found in Fu and Lu (2008).

A good example is public broadcasting in countries like Switzerland and Germany where “Rundfunkgebühren”, a form of user fees, have to be paid as soon as a household owns a radio or TV set. Broadcasting is of course non-rival in consumption between different users. However, for every single user there exists a tradeoff between free-riding and paying user fees, and the total consumption will typically fall short of the total supply. In order to enforce user fees, both countries have established agencies with the permission to administer and collect the fees (Billag AG in Switzerland and Gebühreneinzugszenrale in Germany). They are empowered to carry out random-checks to ensure compliance, which makes free riding costly from the point of view of the individual user because he has to invest in precautionary measures to prevent being detected.

See Grossman (2001) for further reference.

The corresponding second-order conditions are assumed to be fulfilled.

See Buchanan and Yoon (2000).

And any other criterion of justice based on welfarism as well, of course.

To be more specific think for example of freight at the port of Rotterdam that has to ultimately be shipped to Basel at the Swiss–French–German Border. The freight has to pass through the Netherlands but can then be either shipped via France or Germany.

One has to distinguish between the production costs of a given quantity of the spillover good that may be positive or not, and the costs of an additional user that are necessarily equal to zero if the good in non-rival in consumption.

The calculations of this model have been carried out using the software package Mathematica 8.0. The source code can be received from the authors upon request.

See Garfinkel and Skaperdas (2007) for a comprehensive discussion.

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Clotfelter, C. T. (1978). Private security and the public safety. Journal of Urban Economics, 5, 388–402. CrossRef

Corchón, L. C. (2007). The theory of contests: a survey. Review of Economic Design, 11, 69–100. CrossRef

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Fu, Q., & Lu, J. (2008). Micro foundations of multi-prize lottery contests: a perspective of noisy performance ranking. Social Choice and Welfare (forthcoming)

Fuest, C., & Kolmar, M. (2007). A theory of user-fee competition. Journal of Public Economics, 91, 497–509. CrossRef

Garfinkel, M. R., & Skaperdas, S. (2007). Economics of conflict: an overview, handbook of defense economics. Amsterdam: Elsevier.

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Janeba, E., & Swope, K. J. (2001). Taxes or fees? The political economy of providing excludable public goods. Journal of Public Economic Theory, 7, 405–426.

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Laux-Mieselbach, W. (1988). Impossibility of exclusion and characteristics of public goods. Journal of Public Economics, 36, 127–137. CrossRef

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Tullock, G. (1980). Rent seeking as a negative-sum game. In J. M. Buchanan & G. Tullock (Eds.), Toward a theory of the rent seeking society (pp. 16–36). College Station: Texas A&M University Press.

Yin, X. (2001). A tractable alternative to Cobb-Douglas utility for imperfect competition. Australian Economic Papers, 40, 14–21. CrossRef

Title: Endogenous free riding and the decentralized user-fee financing of spillover goods in a n-region economy
Authors: Clemens Fuest
Martin Kolmar
Publication date: 01-04-2013
Publisher: Springer US
Published in: International Tax and Public Finance / Issue 2/2013
Print ISSN: 0927-5940
Electronic ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-012-9219-y

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