Urban Economics, Ninth Edition, Chapter 20

Urban Economics, Ninth Edition, Chapter 20

CHAPTER 20 The Role of Local Government McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Introduction This chapter provides an overview of local public goods and discusses the role of local government in a federal system of government. Local governments provide a wide variety of goods and services, including schooling, public safety, parks, and transit systems.

Alternative mechanisms to choose the level of local public goods include majority rule, benefit taxation, and sorting households with respect to demand for local public goods, also known as voting with your feet. Majority rule is unlikely to generate the efficient level of a local public good. McGraw-Hill Education. Per-Capita Spending by Local Governments, 2012

McGraw-Hill Education. Role of Local Government Musgrave and Musgrave (1980) distinguish among three roles for government: stabilization income redistribution resource allocation. Discuss why the national government has assumed the responsibility for stabilization policy. McGraw-Hill Education.

Local Government in a Federal System (1 of 3) Oates (1972) discusses the advantages and disadvantages of the local provision of public goods. diversity in demand externalities scale economies. The local provision of a public good is efficient if Diversity in demand is relatively large. Externalities are relatively small in a geographic sense. Scale economies are relatively small.

McGraw-Hill Education. Local Government in a Federal System (2 of 3) How do scale economies affect the provision of local public goods? Dozens of studies have examined the relationship between production costs and jurisdiction sizes. The evidence suggests that moderate scale economies are present in the provision of water and sewage services. Because these services are capital intensive, average cost decreases as population increases.

In contrast, studies of other local public goods (police protection, fire protection, schools) suggest that scale economies are exhausted with a relatively small populationabout 100,000. Many small cities use intergovernmental contracts and joint service contracts to join forces and exploit scale economies in the provision of public services. McGraw-Hill Education. Local Government in a

Federal System (3 of 3) The most important trade-off associated with local service provision is between diversity of demand and externalities. Metropolitan government will be more efficient than municipal government if interjurisdictional spillovers are large relative to diversity in demand. In such cases, the advantages of a small local government (the ability to accommodate diverse demands for local public goods) are relatively small, and the disadvantages (the inefficiencies associated with externalities that cross municipal boundaries) are relatively large.

Discuss potential solutions for the problem of spillovers. McGraw-Hill Education. Local Public Goods: Efficiency and Mechanisms A public good is defined as a good that is available for everyone to consume, regardless of who pays and who doesnt. A pure public good has two features: nonrival nonexcludable. For a local public good, we add a third characteristic:

benefits confined to a relatively small geographical area a municipality or a metropolitan area. McGraw-Hill Education. The Efficient Level of a Local Public Good What is the social benefit of parkland? McGraw-Hill Education. Majority Rule and the Decisive Median

Voter: Voter Disagreement Using the graph, illustrate how voters in a three-person city will disagree about the size of the park. McGraw-Hill Education.

Majority Rule and the Decisive Median Voter: The Median Voter Is Decisive McGraw-Hill Education. Majority Rule and the Decisive Median Voter: Majority Rule Is Not Efficient Rule Discuss the implications for the level of public good chosen by majority rule

and the efficient level. McGraw-Hill Education. Benefit Taxation Using the graph, discuss how the benefit-tax plan covers the cost of the efficient park

program. McGraw-Hill Education. The Tiebout Model: Voting with Feet The Tiebout model is a formal model of interjurisdictional mobility. The simple version of the Tiebout model is based on five assumptions. McGraw-Hill Education. 1.

Municipal choice 2. Perfect information and mobility 3. No interjurisdictional spillovers 4. No scale economies

5. Head tax A Closer Look at the Median-Voter Result Lets take a closer look at voting, showing the general applicability of the median-voter result and its limitations. In many local jurisdictions, including most central, large, and heterogeneous populations, decisions about local public goods are determined by voting with ballots rather than feet. The median voter in a representative democracy: In a representative democracy, elected officials make budgetary decisions. A citizen votes for the candidate whose expressed budget position is

closest to the citizens preferred budget. McGraw-Hill Education. The Median Voter in a Representative Democracy McGraw-Hill Education. Implications of the Median-Voter Result The median-voter result provides a strategy to predict the outcome of an election.

Identify the median voter and then estimate his or her preferred budget. As a practical matter, it may be difficult to identify the median voter. One approach is to assume that the desired spending depends on income, so the person with the median income is the median voter. Of course, if the desired spending depends on other variables (for example, household size, age, or political philosophy), a prediction based on the preferences of the median-income voter will be a rough estimate. Discuss how the median-voter result can be used to estimate the elasticities of demand for local public goods. McGraw-Hill Education.

Income and Price Elasticities of Demand for Local Public Goods McGraw-Hill Education. Limitations of the Median-Voter Result The median-voter model has a number of unrealistic assumptions. Although the model provides a useful framework for thinking about voting outcomes, three assumptions limit the models applicability. McGraw-Hill Education.

1. Ideology 2. Single issue 3. All citizens vote

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