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The impossible trinity: Competitive markets, free entry, and efficiency

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  • Mehlum, Halvor
  • Natvik, Gisle J.
  • Torvik, Ragnar

Abstract

We present a model in which workers make occupational choices and vote over a tax rate which determines the level of government spending. Workers in occupations whose services are in high (low) demand by the government favor high (low) taxes. We show that the socially efficient size of the public sector cannot be supported in a political economic equilibrium. The reason is that equilibrium tax rates always reward excessive entry into the politically most powerful sector, and thus the equilibrium size of government is always either too big or too small. We show that this is an example of a more general political economy result that extends well beyond the baseline model and holds quite generally: the combination of (i) competitive markets and (ii) free entry is inconsistent with (iii) allocative efficiency.

Suggested Citation

  • Mehlum, Halvor & Natvik, Gisle J. & Torvik, Ragnar, 2024. "The impossible trinity: Competitive markets, free entry, and efficiency," Journal of Public Economics, Elsevier, vol. 239(C).
  • Handle: RePEc:eee:pubeco:v:239:y:2024:i:c:s0047272724001762
    DOI: 10.1016/j.jpubeco.2024.105240
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    More about this item

    Keywords

    Political economy; Endogenous political interests; Size of government; Efficiency and popular support;
    All these keywords.

    JEL classification:

    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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