Econ 137: Urban & Regional Economics
Econ 137: Urban & Regional Economics
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Date Created: 03/24/14
Lecture 16 Loca public goods and competition between municipalities 102213 457 PM Local public goods and competition between municipalities Structure of municipalitv boundaries varies considerablv across cities This raises some questions Why are some cities unified while others are divided into many separate municipalities What are the advantages and disadvantages of each model How do these differences affect the ability of cities to provide local public goods Local public goods Features of public goods Goods for which consumption is shared among consumers Consequence of this sharing is that it is hard to price the value of a public good to individuals and hard to split the costs accordingly since different consumers may value the public good differently This may lead to under provision or over provision of local public goods Some examples of local public goods Police and fire protection Parks Clean air or water Public schools Note that all of these can be purchased privately but generally they can be provided more effectively as a public good o Eg people could all hire individual bodyguards to provide protection but having a public police force is probably more effective Local public goods a simple example Suppose that there is a municipality with three residents considering how many police to hire o Sociallv optimum level of local public goods when the marginal increase in the sum of the public good value across all consumers is set equal to the marginal cost of providing that public good so MBMC 0 Note Example comes from Brueckner Ch 8 Socially optimal public goods expenditure Determining the level of local public goods In the US local public goods levels are determined through the democratic process Economists often model this using the median voter model In this model outcomes match the preferences of the median voter But if residents within a municipality are heterogeneous then these values will be too high for some too low for others Some would prefer higher taxes and more public goods Others prefer lower taxes and fewer public goods Residents may also differ on which public goods they prefer Also majority rue voting does not take into account the strength of individual preferences Median voter public good expenditure hen median voter will not choose socially optimal level See graph in slides An example EX In March of 2013 LA voters were asked whether to approve a city sales tax increase to help fund public safety services Tiebout sorting Assumptions 0 Consumervoters have heterogeneous preferences for local public goods levels and corresponding tax rates 0 Consumervoters are mobile across locations 0 There are many communities offering different levels and mixes of local public goods 0 Communities are endowed with some fixed factor eg land Because of this they have an optimum size and they try to attract residents in order to attain this optimum size Implications of Tiebout sorting Consumer mobility across locations forces municipalities to compete for residents This competition leads the model to approximate the efficient solution that would have been attained if all goods were private instead of public Mobility also generates municipalities made up of similar individuals sorting STUDY Hoxby 2000 in a controversial paper looks at how Tiebout sorting affects the quality of local schools Suppose that households are confined to a particular metropolitan area eg for work Tiebout sorting predicts that metropolitan areas that offer more choice in this case more school districts should have better schooling outcomes Boston Metro Area has over 70 public school districts lots of choice In Miami the Dade County School District covers essentially the entire metro area little choice Hoxby uses natural features streams which influenced the number of historical school districts in each metropolitan ar Results Tiebout choice among pubic schoo districts raises school productivityTiebout choice raises productivity by simultaneously raising achievement and lowering spending Tiebout choice appears to have larger productivity effects in states where school districts have greater financial independence Where households have more Tiebout stye choice they are less likely to choose private schools So there is some controversial evidence that competition between municipalities may increase productivity When is this result likely to fail A key assumption of the Tiebout model is that there should not be public good spillovers across municipalities But for many public goods these spillovers are likely to be significant Clean air or water are not confined within one area Transportation systems have network externalities Crime may spillover from one area to neighboring districts If these factors are sufficiently important then the benefits of a unified municipality may outweigh the costs of reduced choice Would this work as well if it were shared by many separate cities Capitalization Suppose that 1 Households are mobile and shop between municipalities for better public goods 2 Some municipalities are able to offer better public goods than others 0 Then more households should want to live in the municipalities with better public goods This increases demand for housing in those municipalities driving up land values and rental prices Process should continue until the higher land prices fully offset the advantages of living in a particular municipality In other words the benefits of the public goods are fully capitalized into land values Empirical studies find evidence that capitalization is taking place Housing values adjusted for housing characteristics are increasing in public goods values One implication of capitalization is that property owners will have incentives to ensure that their city is efficiently producing public goods since that will increase their property values But for renters more efficient public goods production is offset by higher rental rates and they are not better off Some evidence on capitalization and sorting Boustan 2013 looks at how much people are willing to pay to live in highincome suburbs Motivating example Between 1970 and 1980 the median income for households in Evanston IL increased 2000 In Chicago which surrounds Evanston median income fell by 3000 0 At the same time the housing price gap between Evanston and Chicago increased by 3 percentage points Research design Need to separate two factors People39s desire to live near highincome neighbors People39s desire to live in municipalities with high incomes overall High municipality income means a larger tax base Can allow for lower marginal tax rates or better public services like schools How can we separate these factors Boustan39s approach look at municipality borders Consider two houses one on each side of a municipality border Both houses share effectively the same neighborhood But the houses are in different municipalities Thus comparing houses on municipality borders allows Boustan to separate the two factors This research design is called Regression Discontinuity or RD Result 1 house prices jump at the borders 0 Boustan shows that these discrete changes are related to levels of taxes and public goods expenditures Competition between municipalities One way municipalities in the US compete is by offering tax breaks to attract new companies 0 Mercedes received 250 million in incentives to locate a plant in Vance AL 165000 per job 0 Toyota plant in Georgetown KY was awarded 200 million 80000 per job 0 Boeing was granted 50 million for relocating their corporate headquarters to Chicago 100000 per job 0 Two questions Is winning one of these plants worth the cost 0 Is it socially optimal for municipalities to compete in this way 0 Is winning one of these plants worth the cost Winners curse A result from game theory that suggests that the winner of an imperfect information common vaue auction overpays We may be worried that attracting these plants are not worth the high price in sacrificed tax revenue that municipalities pay One way to test the overall value of a new plant capitalization If benefits outweigh the costs then this should be capitalized into higher land values Greenstone and Moretti 2004 Want to know if having a large plant come to an area has a net positive effect Main issue More successful counties are likely to be the ones to attract new plants Need some way to compare credibly similar counties where one gets a large new plant and the other does not Solution Use a corporate real estate journal Site Selection Reports the county receiving a million dollar plant and the runnerup county Argue that the runnerup county is similar to the winning county Compare outcomes in these two counties following the opening of the plant Findings Wage bills increase in cities that attract large plants values also rise If the impact of the plant is capitalized into property values then this suggests that winning the plant was worth the cost In other words competing for plants may be individually optimal for counties Results are very reliant on the assumption that winning and runner up plants would have performed similarly in the absence of the plant Housing Is competition for plants socially optimal Consider If US municipalities could not compete amongst themselves in this way the winning municipality would not have sacrificed the tax revenue Firms would then make their decision based on which location was best for them without the distortion introduced by tax competition On the other hand if municipalities are prone to extracting a greater than socially optimal level of taxes from firms competition may reduce this impulse In summary The division of metro areas into municipalities can take many different forms These forms affect public goods production by determining Competition Sorting Coordination When residents are mobile the benefits of better run cities will be capitalized into land values Municipalities also compete a practice that may be individually optimal for cities but may not be socially optimal
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