The Fiscal Decision The Fiscal Decision Process: Process: Theory of Public Theory of Public ChoiceChoice

Bureaucracy and the Bureaucracy and the Supply of Public ServicesSupply of Public Services

What is Bureaucracy ?What is Bureaucracy ? Bureaucracy is the social institution through Bureaucracy is the social institution through

which publicly provided services are publicly which publicly provided services are publicly produced.produced.

The alternative to bureaucratic supply of public The alternative to bureaucratic supply of public service is the purchase of such services from service is the purchase of such services from private firms.private firms.

What differences exist between the two What differences exist between the two institutions with respect to the incentive institutions with respect to the incentive structure?structure?

The lack of competition among public bureaus.The lack of competition among public bureaus. The lack of profit incentive.The lack of profit incentive. Public services are not sold for a price. Public services are not sold for a price.

Niskanen Model of Niskanen Model of bureaucracybureaucracy

Bureaucrats are interested in obtaining such Bureaucrats are interested in obtaining such thing as: higher salary, prestige, power, and thing as: higher salary, prestige, power, and patronage.patronage.

To obtain these things is positively correlated To obtain these things is positively correlated with the size of the budget.with the size of the budget.

Niskanen argues that the objective of budget Niskanen argues that the objective of budget maximization combined with the position of maximization combined with the position of most bureaus as monopoly suppliers of some most bureaus as monopoly suppliers of some public services will result in excessive supply public services will result in excessive supply of such services.of such services.

Bureaucrats are confronting ministry of Bureaucrats are confronting ministry of finance with “all or nothing” finance with “all or nothing”

Can bureaucratic Can bureaucratic Performance Be Improved? Performance Be Improved? More CompetitionMore Competition

Collectively financed contract Collectively financed contract services.services.

Voucher plan for education as an Voucher plan for education as an example.example.

Public Choice and Public Choice and Budgetary SizeBudgetary Size

The Separation of The Separation of Expenditure and Tax ChoiceExpenditure and Tax Choice Example husband and wife.Example husband and wife.

Spending proclivity and budget balance Spending proclivity and budget balance (budget constraint prevent over (budget constraint prevent over spending).spending).

Balanced – budget rule and Keynesian Balanced – budget rule and Keynesian fiscal policy (Balanced – budget prevent fiscal policy (Balanced – budget prevent over spending). Keynesian economists use over spending). Keynesian economists use budget as an instrument to achieve budget as an instrument to achieve macroeconomic objectives as full macroeconomic objectives as full employment, and economic growth. employment, and economic growth.

Fragmentation of Fragmentation of Budgetary Decision MakingBudgetary Decision Making Decision taken with respect to a Decision taken with respect to a

single budgetary component may single budgetary component may affect the setting for decision on affect the setting for decision on other components and these spill other components and these spill over or externality may not be over or externality may not be considered.considered.

Example: Highway construction Example: Highway construction and subsidization of mass transit and subsidization of mass transit system.system.

Controllability of outlays Controllability of outlays and budgetary sizeand budgetary size

Once a program are instituted Once a program are instituted the government can do little to the government can do little to control increase in number of control increase in number of recipients and is legally recipients and is legally committed to increase outlay committed to increase outlay sufficiently to cover these sufficiently to cover these persons.persons.