Assumptions of the Tiehout Economic Model
Source: PSEUDO-PUBLIC GOODS AND URBAN DEVELOPMENT: A Game Theoretic Modelof Local Public Goods, ANDREW J. PADON* Michigan State University http://fla.st/1Fq2oHN
In his model, Tiebout hypothesizes the seven minimal conditions that are necessary for the desired efficiency results to come about. They are:
(i) Consumer-voters are fully mobile and will move to that community where their preference patterns, which are set, are best satisfied.
(2) Consumer-voters are assumed to have full knowledge of differences
among revenue and expenditure pattems and to react to these differences. (3) There are a large number of communities in which the consumer-voters may choose to live.
(4) Restrictions due to employment opportunities are not considered, and it may be assumes that all persons are living on dividend income.
(5) The public services supplied exhibit no extemal economies or diseconomies between communities.
(6) For every pattern of community services set by a city following the preferences of its older residents, there is an optimal community size.
(7) Communities seek to adjust their population size in order to
attain and maintain the optimal size for their package of services (Tiebout, 1956).
Assumptions l and 2 imply that all consumer-voters are rational, utility-maximizing actors with full and complete information. Assumption 3 implies a competitive marketplace in which no city has monopoly or oligopoly power over consumers. As a result, eachcity-tirm is a “price-taker” competing simply through the quality of its LPG package.
Assumption 4 removes the constraints of employment opportunities and their locations from the housing decisions of consumer-voters. As such, this assumption grants individuals complete mobility between communities, as required by assumption 1.
Assumption 5 simply assumes thaat no externalities, positive or negative, are present in the market.
The final two assumptions deal with the issue of economies of scale. Assumption 6 implies that for each distinct LPG package, there is some population level and related level of production at which the entire package can be produced for the lowest average cost per resident. This also assumes the provision process is already as efficient as possible in its intemal functioning. lt is important to note that this does not require all or even any of the individual goods provided by the local govemment to be produced at their most efficient quantity, merely at tl1at level that produces the lowest overall cost for the total package (see Ostrom, l972).
When combined with the attempts to reach this population size, which is embodied in assumption 7, the local community approximates the profit-maximizing
firm of the general economic model. It attempts to raise the number of consumer-voters it serves, at a given tax level, to the point where its costs are minimized and then seeks to prevent any more customers from purchasing its services.
Absurdities of the Tiebout Model
by Bryan Caplan, Absurdities of the Tiebout Model, DECEMBER 12, 2012, http://bit.ly/1cFHYO1
Economists across the political spectrum embrace the realism of the Tiebout model. The model’s intuition: At the level of local government, there are many consumers (i.e. residents and businesses), many suppliers (i.e. localities), and low switching costs – all the key ingredients of perfect competition.
The upshot: We don’t need to worry about the efficiency of local government policy. The quasi-free market will take care of things. To retain population and business, local governments have to offer a competitive package of taxes and benefits. Any government that implements policies that fail a cost/benefit test will by definition be unable to pass the market test. At the local level, therefore, whatever is, is efficient.
To repeat, the Tiebout model enjoys bipartisan support. Liberal economists like the Tiebout model because it exempts at least one level of government from criticism. Conservative economists like the Tiebout model because it affirms the value of competition and decentralization. On reflection, however, the Tiebout model has big absurd implications.
Absurdity #1: There will be no redistribution at the local level.
If a locality even slightly overcharges any segment of the population (the rich, the childless, business, whoever) for the services it receives, that segment will flee. Final resources redistributed: zero. Defenders of the model often actually claim that this implication is true, but there’s an ironclad counter-example: public schools. Even today, public schools are heavily funded by property taxes – and the rate has nothing to do with the taxpayer’s number of school-age children.
In a Tiebout world, there would be immediate blowback. Childless residents would flee to their own separate, child-free, school-free, ultra-low-tax district. Residents with one child wouldn’t want to join them, but they wouldn’t want to subsidize their more fertile neighbors, either. They’d have their own separate one-child, small-school, low-tax-district. And so on.
On further reflection, the Tiebout model also predicts far lower taxes on businesses than on residents. Unless there’s slavery, business is inherently “childless.” Any locality that taxed business property to fund public schools would find itself bereft of business. Business would then relocate a foot from the residential locality’s border – and pay only the taxes necessary to pave the roads, patrol the streets, and put out the fires. To forge a mixed-use district, local government have to charge businesseslower tax rates than flesh-and-blood families.
The one exception to the “no Tiebout redistribution” rule is redistribution that corrects local externalities. Tiebout governments might tax emissions to clean the air or impose congestion tolls to clear the roads. The catch, however, is that everyone who continues to reside in the locality must selfishly prefer the redistribution’s indirect benefits to its direct costs.
In a Tiebout world, any social insurance program would have to act like a for-profit insurance company. Rates would match risks, pure and simple. This means that the poor would probably pay not just higher tax rates for welfare or unemployment insurance than Bill Gates; each poor person would probably pay more dollars of taxes for these programs than Bill Gates. After all, what is the probability that Gates will ever go on welfare? One-in-a-billion?
Absurdity #2: There will be no waste at the local level.
In the Tiebout model, local governments only supply goods if they have a cost advantage over the private sector. If a locality taxes a resident $1000 to buy the resident goods that the market could supply at $900, the resident will move away – and a competing locality will eagerly accept his patronage. The only way to retain people and money, therefore, is to deliver the goods at the lowest possible cost. If the private sector does the job best, local governments will embrace laissez-faire.
By this argument, if the private sector could supply education more cheaply than the public sector, there would be no public education. “Unfair to the poor”? That’s not Tiebout talk.
Yet the NEA need not despair. The mere fact that school vouchers haven’t been adopted proves that public schools work better than any alternative – bloated budgets and illiterate students notwithstanding. The same goes for zoning, local licensing, massive park lands that almost no one uses, etc. Everything local governments actually do has to pass that quasi-market test, so who are economists to second-guess the result?