Question

• Why does the Tiebout model solve the problems with preference revelation that are present with Lindahl pricing?

Answer 1

Answer :

The problems with preference revelation with Lindahl pricing arise from the fact that an individual who reports lower preferences for a public good lowers the provision of that public good by only a small amount (since the total provision is average across all members of the community) but lowers his taxes by a large amount (since his taxes are based on his reported preferences). In other words, individuals have an incentive to free ride on the provision of others. In the Tiebout model everyone in each jurisdiction ends up with the same preferences, and the Lindahl prices can therefore be set equal for each resident. This means that taxes are no longer specific to an individual’s report. When an individual reports lower preferences for the public good, he lowers the provision by a small amount, but he also lowers his taxes by a small amount (and lowers everyone else’s taxes by the same amount). This removes the incentive to free ride and solves the problems with preference revelation.

In the Tiebout model everyone in each jurisdiction ends up with the same preferences, and the Lindahl prices can therefore be set equal for each resident. This means that taxes are no longer specific to an individuals report. When an individual reports lower preferences for the public good, he lowers the provision by a small amount, but he also lowers his taxes by a small amount (and lowers everyone elses taxes by the same amount). This removes the incentive to free ride and solves the problems with preference revelation.