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TheRoleofLocalGovernment

Introduction:QuestionstoAddressWhatistheroleoflocalgovernmentinthefederalsystem?Whydoesvotingwithmajorityrulegenerateinefficientoutcomes?16-216-316-4NationalversusLocalGovernmentRolesofGovernment:stabilization,incomedistribution,resourceallocationStabilization:Monetary&fiscalpolicyatnationallevelIncomedistribution:LocaleffortsunderminedbymobilityoftaxpayersandrecipientsResourceallocationbylocalgovernmentProvidelocalpublicgoodsManagenaturalmonopoliesInternalizelocalexternalities16-5CharacteristicsofaLocalPublicGoodNon-rivalinconsumptionNon-excludable:impracticaltoexcludethosewhodon’tpayLocal:Benefitsconfinedtosmallgeographicalarea16-616-716-816-9AssumptionsofTieboutModel:VotingwithFeetEachhouseholdchoosesmunicipalitywithidealleveloflocalpublicgoodPerfectinformationandmobilityNointer-jurisdictionalspilloversNoscaleeconomiesHeadtaxfinanceslocalpublicgood16-10Sorting:DemandforLocalPublicGoodsExampleinFig16-1:Loisville(6acres),Marianville(12),Hiramville(28)EvidenceofTieboutSortingLosAngeles:communitiesarehomogeneousw.r.t.demandLargervariationindemandmeansmoremunicipalitiesNational:Greaterethnicdiversitymeansmoredecentralization16-11BenefitTaxationBenefitTaxisproportionaltoprivatebenefitofpublicgoodPracticalitiesDoesgovernmentknowmarginalbenefitofindividualcitizens?Howroughlydoesbenefitincreasewithincomeorpropertyvalue?16-1216-13LocalGovernmentandNaturalMonopoliesNaturalmonopoly:IncreasingreturnstoscalelargerelativetodemandExamples:Water,Sewerservice,masstransit16-1416-15LocalGovernmentandExternalitiesAxiom3:ExternalitiesCauseInefficiencyLocalgovernmentsrespondtolocalexternalitiesChapter8:Educationexternalitiesfromteamwork,voting,crimereductionChapter10:automobileexternalitiesPublicprovisionisoneresponsetoexternalities16-16EducationVouchersVoucher(coupon)canbeusedtopayforeducation,publicorprivateSchoolsqualifyforvouchersbysatisfyingbasicrequirementsConsequencesofvouchersCompetitionfostersefficiency?Willpeerenvironmentoflow-incomestudentsdeteriorate?16-17TargetedVouchersforLow-incomeFamiliesPreventsincomesegregationthatcouldoccurwithuniversalvoucherResultsHighermathtestscores;nodifferenceinreadingscoresStudentsinsmallpublic-schoolclassesdidjustaswellBenefitsofvouchersfromsmallclasssize?Willvouchersgeneratebetterteachers?16-18ExternalitiesfromPublicSafetyProgramsPoliceandcrimecontrolCapturingexternality:EveryonebenefitswhencriminalcapturedChasingexternality:OthersbearacostwhencriminalfleesFireprotection:Firescanspread16-19FederalismandMetropolitanGovernmentWhenisLocalProvisionEfficient?Diversityindemand:LargeExternalities:Relativelysmallingeographicalsense(withinthejurisdiction)Scaleeconomies:RelativelysmallFactsonScaleEconomiesModeratescaleeconomiesinwaterandsewageserviceOtherlocalpublicgoods:scaleeconomiesexhaustedatpopulation=100k16-20RationaleforMetropolitanGovernmentInterjurisdictionalexternalitieslargerelativetodiversityindemandIntergovernmentalgrantstosubsidizelocalactivitiesManagemetropolitannetworks:highways,disposal,schools,airsheds,watershedsMetropolitangovernment:Portland,Minneapolis-St.Paul16-21ACloserLookattheMedian-VoterResultMedianvoterisdecisive;majorityrulechoosespreferencesofmedianvoterDoeselectionformatmatter?16-2216-2316-24ImplicationsoftheMedian-VoterResultNoreasontoexpectvotingtogeneratesociallyefficientoutcomeTopredictoutcomeofelection,needpreferencesofmedianvoterUsedatatoestimateelasticitiesofdemandforlocalpublicgoods16-2516-26UnrealisticAssumptionsoftheMedian-VoterModelAssumesawayideology:PoliticianscareonlyaboutwinningelectionsAlternative:PoliticiansasopinionleadersratherthanfollowersAssumessingleissue:Ifmanyissues,candidatesofferbundleofposi

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