URBAN ECONOMICS

1.  Sorting by demand for local public goods

a. Local public goods

(1) Characteristics:

(a)  Nonrivalrous consumption - consumption by one person does not reduce consumption by others

• Pure local public good => MC = 0
  
  
• Impure or congestible public good - semirivalrous

(b)  Nonexcludability - impractical to exclude some people from consuming good

(c)  Localized benefits - benefits confined to small geographic area

Ex. - Parks, police and fire protection

(2) Optimal provision

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Result of voting:

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b.  Tiebout model

• Individuals differ in preferences and willingness to pay

• Individuals "vote with their feet" - move to communities with desired level of services and taxes

(1) Assumptions

• Households "shop" for jurisdiction with the right combination of local public goods and taxes

• Households have perfect information and mobility

• No interjurisdictional spillovers - no benefits outside of a jurisdiction

• No scale economies
  
  
• Financed by head tax

(2) Consequences

(a)  Communities homogeneous, more efficient

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(b)  Income and bid-rent

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(3)  Property tax financing

• Large houses => lower tax rate
  
  
• Sort according to housing consumption and property values, in addition to demand for public goods
  
  
• Use exclusionary zoning (large minimum lot size) to limit entry
  
  
• Sorting by housing demand => sorting by income

 

2.  Sorting by peer groups

• Good learning environment in schools sought
  
  
• One factor is peer group in schools
  
  
• Better peer groups with higher education and higher income

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• Sorting reinforced if marginal benefit of test scores per unit of land used is higher for the rich than for the poor
  
  
• Mixing if marginal benefit of test scores per unit of land used is higher for the rich than for the poor

3.  Racial sorting

Index of dissimilarity - the proportion of members of one group that would have to change their area of residence to achieve an even distribution

Ex. - San Diego

Race / Ethnicity	Dissimilarity Index (D)
American Indian or Alaska Native	0.328
Asian or Pacific Islander	0.461
Black or African American	0.535
Hispanic	0.506

U.S. Bureau of the Census

a. Reasons for segregation

(1) Racial attitudes and tension

• Different attitudes concerning integration among different races

(2) Income differences

• Differences in incomes between different groups, housing less expensive in central cities

(3) Discrimination in housing markets

• Minorities shown fewer dwellings, steered toward certain neighborhoods, given less advice

(4) Exclusionary zoning

• Zoning used to exclude low-income housing

(5) Housing policies

• Low-income housing programs concentrated in central cities

b. Neighborhood transition

• Number of departing whites increases as minority share of neighborhood population increases

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• Tipping point phenomenon - rapid exodus when proportion reaches 30%