Is the public sector too large in a democracy?

Abstract

The public sector supplies a club good financed by either a head tax or proportional taxation on exogenous incomes in a democracy. For a class of utility functions and club quality functions, the optimal club quality is independent of the income distribution, and hence of the identity of the median voter. With ”uniform and universal” public provision , the median voter chooses the head tax or proportional tax rate. This can result in lower levels of club goods in either financing regime than would occur in the first best. However, provision in all the latter three regimes can be lower than would occur via market supply by a “not for profit” organisation.club good; democracy; taxation