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The Tiebout Model
Fred Foldvary: Geo-Rent: A Plea to Public Economists
The landmark model of competition among communities in the provision of collective goods is that of Charles Tiebout (1956), which, as Bruce Hamilton (1991, 672) stated, offered an "antidote to Samuelson's rather gloomy results." Paul Samuelson (1954, 388) had stated categorically, "no decentralized pricing system can serve to determine optimally these levels of collective consumption" (italics in the original).

Tiebout’s analysis shows that this conclusion does not hold for local civic goods. The consumers can select the communities which best satisfy their preferences. In the Tiebout model, unlike the Buchanan club model, the provision of the club goods is held fixed. Consumers reveal their demands for collective goods through a choice of community, and competition among communities assures that local collective goods are provided at minimum cost. Residents dissatisfied with their community's civic goods will leave, resulting in, at the limit, homogenous communities with respect to the public goods desired by the residents. Joseph Stiglitz (1983) points out that pure homogeneity is not necessary to the Tiebout conclusions if there are productive interactions among people, if there are transportation costs, and if people have different utility functions for land.

Though Tiebout in his model recognizes space with respect to congestion, it is unfortunate that the model itself has no spatial dimensions and no land rent. It was unfortunate both because it made the Tiebout model incomplete and because much of the subsequent Tiebout literature also ignores land. As stated by Hamilton (1991, 673), "the tax instrument is of critical importance if the efficiency or even existence of a Tiebout equilibrium is to be achieved." And as stated by Blankart and Borck (2004, 455), "Problems arise in the Tiebout model if public services are financed by distortionary taxation."

The value of a city park diminishes with the distance from the park. Therefore, ceteris paribus, those closest to the park will have a higher geo-rent. The most efficient way to finance the community is from the geo-rent, not by equal dues payments. The Tiebout model will reflect the territorial ambit of goods only when land and location are taken into account.

The spatial dimension has been recognized in the Henry George Theorem and by analysts who have incorporated the capitalization of civic goods into site value. The empirical studies of Wallace Oates (1969) found evidence for the capitalization of the benefits of local collective goods and of property taxes.

Buchanan and Goetz (1972) found that the internalization of what otherwise would be externalities would occur if the communities are proprietary and if competition equalizes the value of the externality. "Tax shares would have to be related to the size of the locational rent component in individual income receipts" (35; italics in the original). "If all valued 'space' should be privately owned and if competition among proprietary ownership units were effective in all respects, allocational efficiency might emerge" (40). Tyler Cowen (1988, p. 14) notes that models such as that of Buchanan and Goetz "offer the intriguing suggestion that Tiebout's model is better suited to analyses of collective goods provision through proprietary communities." Read the entire article

Nic Tideman:  The Ethics of Coercion in Public Finance
Another economic tradition that comes close to consistency with justice is the Tiebout (1956) tradition, which is concerned primarily with efficiency. In the Tiebout tradition, people sort themselves into communities composed of individuals who have the same preferences for local public expenditures. They are treated justly when they are required to pay taxes to finance public goods, because anyone who is unhappy with his tax bill is free to move to another community.

The principal difficulty with Tiebout's suggestion as a way of achieving justice is that it is developed in the context of a world with an unlimited amount of land. In today's world, people have little opportunity to form communities that express their own tastes for public services, because all land is already claimed by some sovereign nation that specifies the taxes that people who live there must pay....  Read the whole article

Nic Tideman: The Political Economy of Moral Evolution

The limits of individual self-definition are reached when one comes to goods such as air quality, which can only be consumed collectively.12 But since no individual can assert, within the constraints imposed by Neutrality, that his conception of the proper trade-off between air quality and other goods is superior to that proposed by any other person, liberal principles come under tension. Ackerman makes two suggestions for liberal ways of dealing with this tension. The first is what Ackerman calls federalism (which would be more familiar to economists under the name of the Tiebout solution): Let people sort themselves out into groups that favor the same level of air quality and each have the level they prefer. Ackerman recognizes that this solution is not perfect, both because it is not possible for every option with respect to provision of public goods to be offered, and because costs of moving are significant. "Despite these serious imperfections," Ackerman says, "a federal regime is far better than some all-or-nothing solution that would force all deviants to pay for a collectively specified level of good air or force all environmentalists to suffer with bad air merely because they cannot transcend the organizational hurdles imposed upon them by an individualistic property-holding system."13

The other suggestion that Ackerman offers for dealing with differing tastes for public goods is "Lindahl solutions," in which people are called upon to pay for public goods in proportion to the benefits they receive, though he recognizes that we do not possess the means to implement this concept perfectly. Two chapters later, Ackerman addresses the issue of how to resolve disagreements regarding the best approximation to the liberal ideal when its complete attainment is not possible.14 Here he offers a different pair of suggestions: majority rule (with any majority-rule cycles that arise resolved by a random process), and the use of a lottery to pick one of the suggested options. ... read the whole article

 

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