ABSTRACT
INTRODUCTION: HOW DO BUREAUCRACIES BEHAVE? Monopolies are not unique to private product markets. They also exist in the public sector. State agencies and Ministries are effectively single sellers of information and services to governments as buyers. For example, the Ministry of Defence is the sole supplier of information and defence services. A simple model of a monopoly Ministry is shown in Figure 11.11
Figure 11.1
In Figure 11.1, demand and cost conditions are given by the D and S curves, respectively. A private competitive industry would produce the socially optimal output OQc at price Pc. A private monopolist would produce the smaller output OQm at the higher price Pm. A budget-maximising monopolistic bureaucrat would aim to offer an output of OQb, for which the government would be willing to pay a maximum sum shown by the entire area under the demand curve (ORQb). In this example, since Qb is twice Qc, the total budget would be equal to OPcBQb and the output of the monopoly Ministry would be ‘too large’ in that it would exceed the social optimum. This result has implications for the behaviour of monopolistic bureaucrats. They have an incentive to confuse total with marginal costs and benefits. For example, at Qc the bureaucrat can argue that total benefits exceed total costs and that a larger programme is justified. Such an argument is in serious error. The correct ‘rule’ for optimal size is to undertake an activity until, at the margin, the benefits which accrue to society are equal to the costs. However, the monopolistic bureaucrat can exceed the social optimum by persuading vote-conscious governments that only at Qb are total
benefits and costs finally equal: an outcome which will be further supported by the producer interest group favourably affected. On this basis, there is a presumption that industries and services which are directly supported by monopoly Ministries and state agencies will be ‘too large’. Examples include the aircraft, car (Leyland and Chrysler), shipbuilding and weapons industries as well as transport, roads, education and local authority services. In addition, monopoly Ministries have no incentive to be technically efficient. In such cases as defence, hospitals, roads and schools, there are only single Ministries, so that there are no alternative and independent checks on a bureaucrat’s cost and demand estimates. For any chosen output, society could find itself paying more than the minimum level shown by the cost schedule (curve S) in Figure 11.1.2 And yet, monopoly bureaucrats are likely to justify their preferred output of Qb by creating an impression of allocative efficiency. This can be done by deliberately over-estimating demand or under-estimating costs, as shown by curves D1 and S0, respectively, in Figure 11.1.
