The Political Risks of Fighting Market Failures: Subversion, Populism and the Government Sponsored Enterprises

摘要

In this first example, I consider the management of a natural monopoly. The technological basics of the model are standard. There is a single producer, that has perhaps paid fixed costs to enter, and that pays a cost C(Q) to produce Q units that are shared among the N consumers. We now consider a setting where the case for intervention reflects an externality—good or bad—and making two alternations to the model. First, supply is now made by measure one of competitive firms, each with cost functions C(Q). In the absence of subsidies or quantity controls, this leads to first order condition P?=?C′(Q) that determines supply. This keeps the core functions identical to the monopoly case, but drops the assumption that the firm sets prices. I do however assume that if the politicians are corrupt they will try to maximize the earnings of the entire industry not just a single firm. Furthermore, I assume that individual welfare equals V(q)?+?x*Average Level of q?+?Income???Pq, where x represents the size of the externality (x may be positive or negative). Social welfare is now , which is optimized at q_xOpt that satisfies , which will be greater than q_Comp if and only if the externality is positive, i.e. x??0. The following model is an adaptation of Diamond & Dybvig (1983). At time zero, there are three classes of individuals: investors, non-discretionary borrowers, and discretionary borrowers. Borrowers, of both varieties, are endowed with no units of the consumption good in periods zero or one, but they may receive one unit of the consumption good in period two. Non-discretionary borrowers are completely impatient and only care about consumption at time zero, which is denoted c₀. Discretionary borrowers maximize ?c₀ + c₂, where ? 1. It will be socially inefficient for discretionary borrowers to consume in period zero, rather than period two, and this creates a potential welfare loss from overly subsidized borrowing. But since these borrowers will not enter the market unless borrowing is highly subsidized, they will not figure in the discussion of the model until I turn to government interventions. Credit intermediaries, like banks, provide an alternative to the credit contracts and default insurance described above. These intermediaries collect investments from the investors during period zero. Some of this money is lent to borrowers and some must be held to allow impatient investors to withdraw their funds in period one.