Majority Voting and Regulation

Abstract:     
We study a majority voting model of regulation. Citizens vote on an income tax which is used to subsidize a natural monopoly. The model provides positive explanations for the setting of regulated prices in natural monopoly. The optimal price depends on the median voter's tax burden relative to the taxes paid by the mean income earner. We show how changing the income distribution and the tax system change the political support for or against regulation. If the tax system is made more regressive, the median voter may have an incentive to lower taxes and thus increase the price of the natural monopoly. With a regressive tax system, a more unequal income distribution will lower the benefits obtainable from taxing the rich and thus lead to a higher price.

JEL Classification: D72, H24, L43

working papers series