Economic Analysis Of Bureaucracy:

Bureaucracy is a system of administration in which professional class of expert civil servants administers the affairs of the State in an impartial manner and is organized in a hierarchical way. Bureaucrats care very much for formal rules and regulations. It is criticized due to its lengthy and round about way of doing work. Blind following of formal rules and regulations leads to red-tapism. However, red tape to some extent is necessary for providing the essential safety and control devices. Government by law necessitates conformity with the established procedures and legal regulations. In a democracy the politicians frame policy but effective implementation of the policy rests on the efficiency of the bureaucracy.  They control the private sector in a welfare state through appropriate regulations to avoid monopolistic and restrictive trade practices in a mixed economy. The efficiency of the public sector is judged in terms of its achieved social objectives and differs  from that of the private sector, which is based on profit maximization. The success of bureaucracy results in good governance.

Bureaucracy perpetuates the evil of dividing the work of government into many isolated and self-dependent sections, each pursuing its own ends and blowing its own trumpet. Unlike private sector public sector decision-making cares more for routine than for results and get delayed.

Bureaucracy is defined as a set of bureaus, that is, the departments responsible for the services provided by government.  Bureaucratic behaviour is influenced by the structure of bureaus through a specific set of constraints and incentives.  Weber had explained the behaviour of  the rationale bureaucrat in the nineteenth century.  According to Weber, a bureaucrat dispassionately observes the established set of administrative rules and carries them out unquestioningly.  It has been subsequently modified by economists like Niskanen and Berton.  

Niskanen considers a bureaucrat as a utility-maximizer like other individuals.  The utility function of a bureaucrat includes his salary, the size of the staff working for him and their salaries, his public reputation, his perquisites and his power or status.  All these items appearing in the bureaucrat's utility function are directly related to the size of the budget of his department. Hence utility-maximizing behaviour of bureaucrats leads towards increasing  size of the government through budget maximization.

Rent seeking was first systematically explained by Gordon Tullock (1967c). James Buchanan (1980a) has identified three types of rent-seeking expenditures that may be socially wasteful (i) efforts and expenditure of the potential recipients, (ii) efforts of the bureaucrats to obtain or react to the  expenditures of the potential recipients and (iii) third-party distortions induced by the monopoly itself or the government as a consequence of the rent-seeking activity.  The social cost of rent-seeking is explained in the Figure. 

Let us assume that there is a perfectly competitive market for the air-service so the price Pc is determined at MC of the service. Triangle DPcE represents the consumers' surplus.  Airlines employ lobbyists to bribe the government official who award routes. Government officials invest time studying the airlines industry to explore the possibility of granting monopoly.  Suppose monopoly is granted to an airline. Then monopoly price, P_m, is fixed following the marginalist rule.  Area P_m F EP_c which is equal to Pm FLP_c + FLE represents the loss of consumer surplus.  Area FLE represents efficiency loss and P_m FLP_c area represents monopoly rent created.  To achieve the monopoly status, rent-creating airlines can invest resources to increase the probability of monopoly. 

According to Tullock, these invested resources may constitute a social cost of monopoly in addition to the loss of efficiency represented by the triangle FLE.
 
The lobbying effort of the airlines industry is an example of first type of social waste.  The extra efforts of the bureaucrats for  granting monopoly are an example of the second category assuming that bureaucrats are bribed.  The efficiency loss due to the creation of monopoly and the efforts of other  airlines industries in the process of competition for achieving monopoly is the third type of social waste.