URBAN ECONOMICS

1. Role of government

a. Stabilization

• Control inflation and unemployment

• National concern, not local

b. Income redistribution

• Difficult at local level, people can move to avoid redistribution

c. Resource allocation

• Determining the appropriate production of goods

(1) Natural monopoly

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Ex. - Sewage, mass transit

(2) Externalities

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Ex. - Education, art, libraries

• Public safety externalities could work either way - external benefits if criminals caught, external costs if criminals driven to another jurisdiction

(3) Local public goods

(a) Characteristics:

i)  Nonrivalrous consumption - consumption by one person does not reduce consumption by others

• Pure local public good => MC = 0

• Impure or congestible public good - semirivalrous

ii)  Nonexcludability - impractical to exclude some people from consuming good

iii)  Localized benefits - benefits confined to small geographic area

Ex. - Parks, police and fire protection

(b) Optimal provision

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Result of voting:

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(c)  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

i) 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

ii) Consequences

• Communities homogeneous, more efficient

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• Income and bid-rent

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• Sorting reinforced if marginal benefit of local public goods per unit of land used is higher for the rich than for the poor

• Mixing if marginal benefit of local public goods per unit of land used is higher for the rich than for the poor

iii)  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

2. Optimum level of government

a. Local provision of goods

• Meets diverse demand => improved efficiency

• Externalities if not big enough => inefficient

• Higher costs if economies of scale exist

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b. Metropolitan consolidation

• Can exploit economies of scale

• Deals with externalities

• Prevents suburban exploitation

• Can equalize tax rates

• Can equalize spending

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c. Tiebout model and metropolitan consolidation

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• Consolidation deals with externalities, but not with diversity

3. Local revenue

a. Property tax

Tax on residential, commercial and industrial property

• Assessed value - official value of the property for tax purposes

• Tax rate - percent of assessed value paid in taxes

• Property tax = Assessed value * tax rate

Ex. - 

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(1) Residential property tax

Who bears the burden of the property tax?

(a) Land

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(b) Improvements (traditional view)

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(c) Improvements (new view)

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(2) Commercial and industrial

Who bears the burden of the commercial and industrial property tax?

(a)  Land

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(b)  Improvements

• May move to other cities

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(c)  Differential tax rates

• Residential and business taxed at different rates

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• Prices of goods affected

• Tax exporting - goods consumed by people from outside the city

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(3) Property tax limitation

(a)  Types of limits

• Limit on tax rate for a particular type of government

• Limit on tax rate for overall local spending

• Limit on property tax revenue growth

• Limit on assessment growth

(b)  Proposition 13 (1978)

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(c)  Consequences

• Decreased property tax revenue

• Increase in charges and fees

b. Intergovernmental grants

• Grants of money from higher level of government to lower level of government

• Used to deal with interjurisdictional spillovers, and because of mismatches between revenue and expenditures

• Types of grants:

(a) Unconditional grant - can be spent on wide variety of purposes

(b) Conditional (categorical) grant - funds earmarked for narrow range of purposes

(c) Matching grant - recipient must match amount of grant with spending on specific activity

(d) Block grant - consolidation of categorical grants