Efficient indirect regulation under Protection for Sale

Abstract

Regulatory intervention is necessary to overcome market failures. However, this kind of intervention may also create Protection for Sale conditions in the market—which might, in turn, lead to an inefficient resource allocation. This paper examines the effect of an indirect intervention on regulated market welfare under Optimal Regulation and Protection for Sale conditions. Although under Optimal Regulation conditions there is zero welfare-loss as it derives from Differential Price Policy (DPP), it seems that under substantial Protection for Sale conditions this price policy increases the welfare-loss, and therefore a Uniform Price Policy (UPP) might achieve a smaller welfare-loss—due to the “free-riding” effect. Furthermore, this paper suggests that in between these two price policies lays a third option, a Combined Price Policy, that can balance between the accurate resource allocation (DPP) and the political pressure reduction (UPP) in order to reduce the welfare-loss and to increase the market efficiency.

This is a preview of subscription content, log in to check access.

Fig. 1
Fig. 2

References

  1. Arrow, K. J. (1951). An extension of the basic theorems of classical welfare economics. In P. Newman (Ed.), Reading in mathematical economics. Baltimore: Johns Hopkins Press.

    Google Scholar 

  2. Bernheim, B. D., & Whinston, M. D. (1986). Menu auctions, resource allocation, and economic influence. Quarterly Journal of Economics, 101(1), 1–31.

    Article  Google Scholar 

  3. Bombardini, M. (2008). Firm heterogeneity and lobby participation. Journal of International Economics, 75(2), 329–348.

    Article  Google Scholar 

  4. Buchanan, J. M., & Tullock, G. (1975). Polluters’ profits and political response direct controls versus taxes. American Economics Review, 65(1), 139–147.

    Google Scholar 

  5. Debreu, G. (1951). The coefficient of resource utilization. Econometrica, 19(3), 273–393.

    Article  Google Scholar 

  6. Finkelshtain, I., & Kislev, Y. (1997). Prices vs. quantities: the political perspective. Journal of Political Economy, 105(1), 83–100.

    Article  Google Scholar 

  7. Furusawa, T., & Konishi, H. (2011). Contributing or free-riding? voluntary participation in pubic good economy. Theoretical Economics, 6(2), 219–256.

    Article  Google Scholar 

  8. Gawande, K., & Hoekman, B. (2006). Lobbying and agricultural trade policy in the United States. International Organization, 60(3), 527–561.

    Article  Google Scholar 

  9. Gawande, K., Krishna, P., & Olarreaga, M. (2012). Lobbying competition over trade policy. International Economic Review, 53(1), 115–132.

    Article  Google Scholar 

  10. Gawande, K., & Magee, C. (2012). Free-riding on Protection for Sale. International Studies Quarterly, 56(4), 735–747.

    Article  Google Scholar 

  11. Grossman, G. M., & Helpman, E. (1994). Protection for Sale. American Economic Review, 84(4), 833–850.

    Google Scholar 

  12. Panagariya, A., & Rodrik, D. (1991). Political-economy arguments for a uniform tariff. International Economic Review, 34(3), 685–703.

    Article  Google Scholar 

  13. Zusman, P. (1976). The incorporation and measurement of social power in economic models. International Economic Review, 17(2), 447–462.

    Article  Google Scholar 

  14. Zusman, P., & Amiad, A. (1977). A quantitative investigation of a political economy: The Israeli dairy program. American Journal of Agricultural Economics, 59(1), 88–98.

    Article  Google Scholar 

Download references

Acknowledgements

The author thanks Prof. Israel Finkelshtain and Dr. Iddo Kan for their guidance. Moreover, the author thanks the anonymous referees for their helpful comments. The research in this paper was partially sponsored by a Graduate Scholarship from the Hebrew University of Jerusalem.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Doron Nisani.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Nisani, D. Efficient indirect regulation under Protection for Sale. J Regul Econ 54, 41–52 (2018). https://doi.org/10.1007/s11149-018-9360-3

Download citation

Keywords

  • Protection for Sale
  • Free-riding
  • Menu-auction
  • Regulatory policy

JEL Classification

  • D61
  • D72
  • H42
  • L78