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1. Role of government

Per Capita Local Government Expenditures, 2012
Education	$1,711
Police	$300
Public Assistance	$262
Highways	$190
Public Transit	$171
Fire Protection	$134
Highways	$2,151
Total	$4,919

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a. Stabilization

Control inflation and unemployment

National concern, not local

Local economic development policies may help with employment

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b. Income redistribution

Difficult at local level

People can move to avoid redistribution

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c. Resource allocation

Determine what to produce and how to produce it

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2. Local government in a federal system

• What is the optimum level of government at which a service is provided?

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a. Local provision of goods vs. metropolitan provision

• Diversity in demand for local public goods => local provision better

• Externalities => metropolitan provision better if benefits or costs spill over boundaries

• Economies of scale => metropolitan provision better if large economies of scale

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Local provision efficient if diversity in demand is large, externalities are small, and economies of scale are relatively small

Metropolitan provision efficient if diversity in demand is small, externalities are large, and economies of scale are relatively large

One solution is to grant local governments power to deal with problems that cross municipal boundaries

Ex. - San Diego Association of Governments (SANDAG)

- Congestion, air pollution

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3. Local public goods

Ex. - Parks, police and fire protection

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a. Characteristics:

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

• Pure local public good => MC = 0

• Impure or congestible public good - semirivalrous

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(2)  Nonexcludability - impossible or impractical to exclude some people from consuming good

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

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b.  Optimal provision vs. equilibrium quantity

Median voter determines equilibrium

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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

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(1) Assumptions

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

• Households have perfect information and mobility

• No interjurisdictional spillovers - no benefits outside of jurisdiction

• No scale economies

• Financed by head tax

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(2) Consequences

• Communities homogeneous, more efficient

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d.  Benefit taxation

• Taxes should be proportional to the willingness to pay for local public goods

• "Lindahl tax"

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• Difficult to determine willingness to pay

• Proportional to property value in some cases => use property tax

Ex. - Public safety

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4.  Extensions of the median voter model

a.  Series of budget elections

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b.  Representative democracy

Citizens elect representatives

Representatives positions should reflect median voter

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c.  Implications

 

May not get socially efficient level of a local public good

Difficult to identify median voter to make predictions

Election results can be used to estimate the demand for local public goods

- Most local public goods are income inelastic

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d.  Limitations

(1) Assumes no ideology

Politicians follow preference of voters, don't try to persuade voters to ideology

 

(2)  Single issue dealt with at a time

Candidates may offer a bundle of positions (platform) if numerous issues involved

 

(3)  All citizens may not vote

One end or the other may not vote