Question

• Think about two public goods – public schools and food assistance for needy families. Consider the implications of the Tiebout model. Which of the goods is more efficiently provided locally? Which is more efficiently provided centrally? Explain

Answer 1

A Brief Introduction to the Tiebout Model

The Tiebout model, also known as Tiebout sorting, Tiebout migration, or Tiebout hypothesis, is a positive political theory model first described by economist Charles Tiebout in his article "A Pure Theory of Local Expenditures" (1956). The essence of the model is that there is in fact a non-political solution to the free rider problem in local governance. Specifically, competition across local jurisdictions places competitive pressures on the provision of local public goods such that these local governments are able to provide the optimal level of public goods

Tiebout believes that the ideas of shopping and competition could be brought into the public sphere to allow for a non-political solution to optimal public goods provision. The model holds that if municipalities offered varying baskets of goods (government services) at a variety of prices (tax rates), that people with different personal valuations of these services and prices would move from one local community to another which maximizes their personal utility. Similar to how shopping and competition lead to efficiency in private good markets, this model holds that individual choices on where to live would lead to the equilibrium provision of local public goods in accordance with the tastes of residents, thereby sorting the population into optimum communities. Basically, if an individual doesn’t like the public goods provision of one town, they can move to the next town over. The model has the benefit of solving two major problems with government provision of public goods: preference revelation and preference aggregation .The Case of Public Schools and Food Assistance

Most of the governments across the world offer social security schemes to its citizens. Be it a developing country from Asia like India or a well developed, advanced economy like USA, the supply of the public goods like social schemes are necessary to ensure equality as well as upliftment of the marginalized and poor sections of the society. From an economic perspective, certain goods ( or the public goods ) may not be allocated by the private sector efficiently and thus, the government may have to intervene in the market to avoid any market failure situation.

In the above case, the question in regarding the allocation of public goods like public schools and food assistance program; which among these two would be efficient if allocated locally. As mentioned above, the Tiebout model tries to look at the linkage between the taxes paid and the benefits received by the people. This linkage is strong in the case of the public schools, when compared to that of the food assistance program.

People who pay taxes to the local authority may have kids who will be making use of the public schools. As a result, these tax payers will be expecting more benefits for the money that they pay to the government. This includes quality, education, support by the skilled teaching professionals etc. These group of people will be willing to pay money as taxing as they expect the positive benefits of education in the community. Thus the public schools must be planned and provided locally.

On the other hand, the food assistance program will be more efficient if it is provided centrally. Tax payers in a particular locality may not fully agree with using their money to provide food assistance to a set of few people in the community, who in most cases may not be paying taxes as they are extremely poor and survive on the food assistance program. In fact, the tax payers move out of the local community that provide food assistance, in the long run as the taxes they pay ends up not matching with the benefits that they receive. It may also happen that the food assistance program may attract an inflow of the poor people from other localities as the scheme seems attractive to them. As a result, according to the Tiebout model, the composition of the community may change in the long run with more of the tax payers moving out and in flow of the people looking for food assistance coming in.