Community Formation Putting these two together The optimal community is one in which the number of members and level of services simultaneously satisfy the condition that the marginal cost equal the corresponding marginal benefit
11 Community Formation • Putting these two together: – The optimal community is one in which the number of members and level of services simultaneously satisfy the condition that the marginal cost equal the corresponding marginal benefit
The Tiebout model Tiebout (1956)argued that the ability of individuals to move across jurisdictions produces a market-like solution to the local public goods problem People distribute themselves across communities based on their demands for public services(and pay taxes for these services) Equilibrium is pareto efficient 12
12 The Tiebout Model • Tiebout (1956) argued that the ability of individuals to move across jurisdictions produces a market-like solution to the local public goods problem. • People distribute themselves across communities based on their demands for public services (and pay taxes for these services). • Equilibrium is Pareto efficient
The Tiebout model Some Key Assumptions Government activities generate no externalities Individuals are completely mobile, and have perfect information with respect to each community's public services and taxes There are enough communities so that each individual can find one with services meeting her demands Constant returns to scale technology Public services financed by a proportional property tax Communities can enact exclusionary zoning laws statutes that prohibit certain uses of land 13
13 The Tiebout Model: Some Key Assumptions • Government activities generate no externalities • Individuals are completely mobile, and have perfect information with respect to each community’s public services and taxes • There are enough communities so that each individual can find one with services meeting her demands • Constant returns to scale technology • Public services financed by a proportional property tax • Communities can enact exclusionary zoning laws – statutes that prohibit certain uses of land
Optimal Federalism What is the optimal allocation of economic responsibilities among levels of government in a federal system? Will discuss the advantages and disadvantages of a decentralized system 14
14 Optimal Federalism • What is the optimal allocation of economic responsibilities among levels of government in a federal system? • Will discuss the advantages and disadvantages of a decentralized system
Optimal Federalism Disadvantages of a decentralized System Several reasons why decentralization may not lead to an efficient allocation of resources Externalities -communities may produce negative or positive externalities for other communities 15
15 Optimal Federalism • Disadvantages of a Decentralized System – Several reasons why decentralization may not lead to an efficient allocation of resources – Externalities – communities may produce negative or positive externalities for other communities