Econ 337 #7 - The decentralization theorem For a local...

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Unformatted text preview: The decentralization theorem For a local public good without economies of scale in production , it will always be more efficient (or at least as efficient) for local governments to provide the Pareto- efficient levels of output for their respective jurisdictions than for the central government to provide any specified and uniform level of output across all jurisdictions. Corollary If there exists considerable heterogeneity individual demands in the nation as a whole and, at the same time, individuals are divided geographically into groups with relatively similar demands, The potential gains from decentralized finance are enhanced. A simple example 12 people. Two types: (8) Q1=4-2P (4) Q2=5-2P Suppose P=1 for everyone How should the public good be provided? Centralized? What is the efficient provision level? What's the welfare loss? What if all the people must be divided into two Distribution of preferences Cost saving effect Price?? (say p1=3/2 and p2=2) Love it or leave it The Tiebout Model 1. Ch. 5 2. Tiebout (1956) 3. The many faces of the Tiebout model by Oates 2005 Recall A free rider problem for public goods. Samuelson (1954): No decentralized pricing system can serve to determine optimally the levels of collective consumption. Tiebout : a structure of many small local governments may be a decentralized pricing system, which generates an optimal amount of public goods. Bruce Hamilton (1987): The Tiebout model is a simple and elegant extension of the competitive model In what way?? In what way? The ability of individuals to move among jurisdictions produces a market-like solution to local public good problem. Vote with your feet A factor individual considers when choosing where to live is the TAX and SERVICE package in the community. Individuals SHOP among localities and BUY the best for them. What does this sorting effect mean? People who like lots of parkland, well- maintained roads, large police forces and good schools can thus gather in high-tax communities ..., while others can choose low-tax communities and spend more of their income on private consumption. Tiebouts attempt To achieve efficient public-goods provision To characterize the specific conditions under which it would work. A bit more details Tiebouts assumptions 1. People are completely mobile and will move their residences to the community that best satisfy their preferences (no restrictions due to employment opportunities.) 2. People have perfect information w.r.t. each communitys public services and taxes....
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Econ 337 #7 - The decentralization theorem For a local...

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