Spatial Clubs:Anderson Chapter 20

Public versus Private Goods

Excludability Rival in Consumption

Lighthouse and Public Defense

Consumer Goods

Internet Providers

Highways

Usual Taxonomy

Is the good rival in consumption?

Is the good excludable?

Yes No

Yes Private Good(Ice Cream)

Impure Public Good(Cable TV)

No Impure Public Good(Crowded City Sidewalks)

Pure Public Good(National Defense)

Alternative Taxonomy

Pure Public GoodsPure Private Goods Impure Public Goods

Big MacTextbook

National DefenseLighthouse

HighwaysParks

SchoolsInternet

Rival in Consumptionand

Excludability

Club

DefinitionA voluntary group of individuals who derive mutual benefit from sharing one or more of the following:• Production costs• Members’ characteristics• Excludable benefits

Country Club (Augusta National)

Club Goods

DefinitionPublic goods that are excludable and subject to congestion.

Provo Rec Center

Characteristics of Club Goods

• Voluntary membership• Subject to congestion or crowding• Distinction of whether the entire population is partitioned into clubs or

not.• Exclusion mechanism• Simultaneity occurs in the two decisions a club must make:

• How of the club good to provide?• Membership size of the club?

• Optimality. In the case of pure public goods, we know that the market mechanism will typically provide too little of the public good.

Taxonomy of Clubs

Tiebout challenged conventional wisdomCompetition among decentralized local governments could actually provide the same efficiency result as was known to hold for private good markets. The essence of the Tiebout model is that people select among the many community packages of public services and taxes, choosing to live in the community that provides the desired quantity of public goods and taxes.

Tiebout Quotation

The consumer-voter may be viewed as picking that community which best satisfied his preference pattern of public goods. This is a major difference between central and local provision of public goods. At the central level the preferences of the consumer-voter are given and the government tries to adjust to the pattern of these preferences, whereas at the local level various governments have their revenue and expenditures patterns more or less set. Given these revenue and expenditure patterns, the consumer-voter moves to that community whose local government best satisfies his set of preferences. The greater the number of communities and the greater the variance among them, the close the consumer will come to fully realizing his preference position.

Implications of the Tiebout Model

• Homogeneity exists within communities with residents having similar tastes for public services and taxes.• Heterogeneity exists across

communities with different service/tax packages offered in different communities.

Tiebout Model Assumptions

• No externalities arise from local government behavior.• Individuals are completely mobile.• People have perfect information with respect to the public services

they receive in each community and the taxes that are required.• There are enough different communities that each individual can find

one with the public services meeting her demands.• The cost per unit of public goods and services is constant.• Public services are financed with proportional property taxes.• Communities can enact exclusionary zoning laws.

Problems with Tiebout Competition

• Perfect mobility• Perfect information• A choice of a wide range of towns that might match tastes for public

goods• Sufficient scale or size• Division of population into groups of people with similar preferences

Problems with Tiebout Financing

• Equal financing among all residents• Lump-sum financing• Property tax financing• Attempt to fix problem uses zoning

No Externalities/Spillovers

• Effects occur only in a given town

Capitalization of Fiscal Differences in House Prices• Definition of capitalization

Optimal Fiscal Federalism

• Tax-benefit linkages

California Proposition 13

• Serrano v. Priest• Severed link between property

taxes and education• School finance equalization

caused wealthy property-tax payers to see that their taxes were paying for benefits accruing to other, poorer citizens in other towns.