In: Economics
Explain the conditions under which Tiebout competition occurs. Why does Tiebout competition lead to efficient education provision?
Tiebout Model was first described by economist Charles Tiebout. It is also known as Tiebout sorting or Tiebout Hypothesis. This model emphasises on the issue of free rider problem. Tax competition was the most important part of his model.
The assumptions or conditions on which the Tibout Competition occurs are as follows:
1. Mobility of consumers- There exist no cost associated with movement.
2. Full/ Complete information
3. No spill over of public goods in terms of costs or benefits from one community to another.
4. Ability to choose from many communities
5. Attainment of optimal size by the communities.
6. Economies of scale
7. Rational Communities
8. The costs and benefits of living in a house is affected by the price of another.
According to Tiebout, if individuals choose their residence based on provision of public good, then the public good should be made available at an optimal level. Tiebout Competition plays a significant role in increasing the efficiency of education provisions. This is because, increased competition leads to increased spending levels. Schools will spend less in districts where they face less competition from other schools which in turn leads to less efficient education production. Hence, Tiebout competition helps in increasing efficiency through increased spending of schools due to increased competition.