Econ 337 #8 - 1. If capitalization occurs, fewer...

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Capitalization. What does it all mean? 1. If capitalization occurs, fewer communities are needed to achieve an efficient equilibrium 2. Communities need be homogenous only in the desired amount of public service and can include households desiring the whole range of housing, the equity concerns may be mitigated. (the equity concerns about the Tiebout process may be mitigated) 3. The local property tax functions as a benefit tax.
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Empirical testing Capitalization effects How to test this effect? Regress house prices on school quality and assess whether high-quality schools lead to higher house prices or on local property tax rates and assess whether higher taxes lead to lower house prices.
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I. Assumptions
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Recall: Tiebout’s 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 community’s public services and taxes. 3. There are many communities from which to choose. 4. No spillovers of public service benefits or taxes among communities. 5. Each community, directed by a “manager,” attempts to produce services at minimum average cost.
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1. People are completely mobile and will move their residences to the community that best satisfy their preferences (no restrictions due to employment opportunities.) 3. There are many communities from which to choose. Are these reasonable assumptions? EX: Chicago area I. Assumptions
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Fischel (1981): Examined the number and structure of local governments in urban areas in the US. Conclusion: The structure of these areas is typically “competitive” rather than “monopolistic.”
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People have perfect information w.r.t. each community’s public services and taxes. 4. No spillovers of public service benefits or taxes among communities. Increase government size
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This note was uploaded on 02/06/2012 for the course ECON 337 taught by Professor Jannetcheng during the Winter '12 term at Northwestern.

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Econ 337 #8 - 1. If capitalization occurs, fewer...

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