The Community in Terms of an Appropriate Level of Public Goods and Services - Research Paper Example

THE TIEBOUT HYPOTHESIS AND RELATED TOPICS I. The Tiebout Hypothesis The Tiebout hypothesis is based on an article d "A Pure Theory of Local Expenditures" published by Charles M. Tiebout in 1956 and later popularized by Warren Oates, who subsequently brought the model into the realm of discourse in public economics. Inspired by an earlier article by Nobel laureate in economics Paul Samuelson about public choice, the model asserts that individual responds to the goods and services offered by local governments (with the corresponding taxes they pay) by choosing the local community that maximizes their utility, or that satisfies their own particular demands. Individuals effectively reveal their preferences by "voting with their feet." (Stoddard 2009). In the process of moving into these communities, a population is sorted into optimum communities based on the individuals preferences. Like any model, the Tiebout hypothesis puts forth a set of assumptions -- namely, access to complete information, free consumer mobility, many buyers and sellers, and consumer rationality. Tiebout also added the assumption that an optimal city size exists and that there are no spillovers of costs and benefits to other communities. The hypothesis has been used to provide insights in public finance about the choices of communities for public goods (e.g., sanitation, education, public security) and how property values correlate with taxes and services that are provided. Zoning laws and regulations have also been explained by using the model. Above all, the hypothesis has had an impact on debates and decision making concerning fiscal federalism and the proper roles of central, regional, and local governments. (ibid.). The case of a bill passed in June 2009 by the New York Senate which was aimed to ease government consolidation, may be used to illustrate the last point (See Confessore, 2009 June). The law simplifies the complex array of laws specifying "how government officials can choose to dissolve or merge towns, villages and the hundreds of special districts that provide water, sewage treatment and other services throughout the state." The statute does not propose consolidation as such but only creates a simple, uniform process by which voters and officials can decide on and execute consolidation, requiring only that 10 percent of registered voters to propose it. It will allow county governments to abolish local government units by a majority. On the pro side, the argument is that too many layers of government have burdened residents with the highest taxes in the country, driving out people and businesses. Also,by consolidating local government activities such as tax collection, it could save some $1 billion in taxes. It would also remove patronage politics inherent in the proliferation of local governments. Those who oppose consolidation, on the other hand, say that special districts, the main target of the law because there are so many (constituting most of over 10,000 units) of them, provide "more efficient and accountable services to taxpayers" and faster response times for firefighting and garbage collection. It must be emphasized that the statute does not directly propose consolidation of local government units and special districts but only facilitates and simplifies the democratic process of voting on a consolidation proposal. However, because of the apparent trend towards consolidation, there is some likelihood that the resolution of consolidation issues will be speeded up in its favor. In a lecture on public choice economics given by Gary Wolfram (2008 December), he stated in an interview that the Tiebout hypothesis implies that more local governments and school districts would mean greater efficiency in the provision of public and non-public services. Where economies of scale is a concern, consolidation would be unnecessary because, citing the case of school districts, the provision of goods and services can be contracted jointly in order to reduce unit costs, without each school district losing autonomy. In support of Wolframs thesis, we must state that U.S. federalism -- which has created many local governments -- was instituted out of a need to improve efficiency. The red tape, delays and confusion engendered by a centralized government would be tremendous, whereas local governments would be more responsive to the constituents needs and more sensitive to the citizens views. The existence of multiple governments offering different packages of benefits and costs would allow for a better match between citizen preferences and public policy (Dye 297). People and businesses can thus "vote with their feet" and relocate themselves to those states and communities that most conform to their own policy preferences. Our opinion is that voters and officials should be educated on the merits and demerits of consolidation by evaluating all the arguments from various sources, as applied to each particular case. Where consolidation means less taxes and more efficiency in the provision of public goods and services, the impact will be favorable. If otherwise, people and businesses that suffer from any consolidation will be motivated to relocate, and policy makers should determine which population types it wants to retain and which to encourage to leave. With regard to the criterion of efficiency, the Tiebout hypothesis suffers from the defect of all models: The assumptions are not reflected in real life. People do not have all the information, certain constraints hamper mobility such as job and family commitments, tolerance and sensitivity to high taxes, inelastic demand for savings in tax expense, among others. In some instances, where taxes are high, residents are motivated to remain because what the high taxes do is to drive away people with low incomes. High taxes are the price the pay for improving the quality of their lives. There are also many other variables other than taxes that help determine whether a resident decides to remain or leave. The equity criterion is violated only when taxes are not matched with benefits to the community in terms of an appropriate level of public goods and services. The case of the city of Detroit is used an example of a declining population because of high taxes and low level of public benefits (See Wolfram). For as long as the cost of taxes are properly matched with public goods and services, the question of inequity to society does not arise, because as the Tiebout model maintains, people will always move to communities that are optimal to them as they conform to their preferences. II. HOV/HOT lanes and the problems they address HOT lanes are tolled lanes that are used alongside highway lanes designed to provide a faster, reliable option for travelers. Not all vehicles will pay in order to travel on the HOT lanes, however: Exempted to access the Capital Beltway buses, carpools, motorcycles, and emergency vehicles (ambulances and firetrucks), and vehicles with three or more riders. Fares vary with real-time traffic conditions, so that tolls will be higher when road congestion is evident, ranging from 10 cents to 1 dollar per mile. There is no maximum limit on toll rates. Mid-sized cars are allowed to use the HOT lanes provided they pay the tolls, but large 18-wheeler trucks are not. Hybrid cars are not given exemption under Virginia law. Tolls collected will be used to finance improvements n the Capital Beltway Corridor along with added capacity and first-time introduction of railway options and high-occupancy vehicles to the Beltway and Tysons corner. Comment The Virginia HOT lanes Capital Beltway project was devised to achieve two purposes: 1) To improve the smooth flow of traffic on Virginia beltways, and 2) To raise toll revenues to finance related transportation improvements. Two criteria may be used in evaluating this project: efficiency and equity. In terms of efficiency, the project will reduce traffic bottlenecks along crucial points in the beltway and create and increase savings on travel time on the part of commuters and travelers. It would also improve the convenience of drivers who are in hurry to reach their offices and appointment destinations on time. The HOT lanes are specially important for emergency use by ambulances, and quicker responses for firefighters and police officers. The overall benefit to society cannot be easily quantified but surveys among users and commuters should be able to derive some indication the effectiveness of the project and the benefits, in qualitative and quantitative (if possible) terms. The tolls collected can be counted as benefits to society if they contribute directly or indirectly to common welfare. In terms of equity, both the cost and benefits have to be considered. The cost to the users of the HOT lanes are the electronically determined variable rates that depend on traffic density or congestion on these lanes. Where the users demand is price inelastic, he will use the lanes despite the existing congestion but he will have to put up with slower-than-usual movement of vehicles, in which case his marginal benefit is less than his marginal cost. In most cases, it would not pay to use the HOT lanes when the toll rates are high. The user should observe a certain benchmark price before proceeding to use them. In sum, the cost is not equitable at the high toll rates levels, where the collection is not proportionate to the personal utility of the users. The rates are fair only when they are low, or at least at an equilibrium point somewhere between the low and high levels. Among road users, 18-wheeler trucks are banned to use the HOT lanes. HOVs (those with 3 or more occupants), buses, carpools, vans, motorcycles, and emergency vehicles are allowed toll-free access. This policy, because it promotes maximum usage of the roads for the maximum number of travelers and commuters is equitable. What has been perhaps overlooked is that users can circumvent the rules. In Jakarta, Indonesia, for example, it has been reported that some drivers pick up waving, hitchhiking tykes along the roads some distance and prior to entering the toll gates in order to fill up the minimum passenger quota of private vehicles. If such be the case, the objective of the policy is undermined. III. Why is it difficult to achieve an efficient allocation of resources in the housing market? Market efficiency, including that in the housing sector, is a function of complete information, many buyers and sellers offering homogeneous goods, mobility, and rationality. In the housing market there are many variables that determine where the point of equilibrium between the demand for and the supply of housing is found. On the side of suppliers (the builders and sellers of homes) there may not be enough information about the population and thei demographic trends, household and individual incomes, availability of credit, and changes, actual or probable, in tastes and preferences of potential home buyers (See McKenzie and Betts 202-209). Such lack of information can lead to the construction of homes in the wrong locations and homes that are not suitable for likely buyers. This can cause or contribute to oversupply and a housing glut in certain communities. On the part of buyers, they may not have complete information about where housing appropriate to their income levels are located. In addition, even if they find suitable housing, they may not have the mobility because their permanent employment and the wishes of the family and/or other reasons may pose an obstacle to relocating. Household and individual Incomes may also not match their preferred types of housing, and this is compounded by the lack of credit. Even if the Tiebout hypothesis says that a person should move because of high taxes in his locality, he may not do so at least for the time being. The result is that there is an excess supply in some communities and a demand for housing in others that is not filled. An excess in supply can cause housing prices to fall while there is unfulfilled demand elsewhere. In this case, the resources are not efficiently allocated within the housing market. Where there is market inefficiency, or market failure, it is the role of the government to intervene and provide the means for buyers and sellers to reach the point of demand-supply equilibrium for housing. BIBLIOGRAPHY Dye, Thomas R. Understanding Public Policy. 7th ed. Englewood Cliffs, NJ: Prentice Hall, 1992 Confessore, Nicholas, Senate Passes Bill to Ease Government Consolidation. The New York Times, 4 June 2009. Accessed 19 December 2009 at http://www.nytimes.com/2009/06/04/nyregion/04consolidate.html?_r=1 McKenzie, Dennis J.& Richard M. Betts. Essentials of Real Estate Economics. 4th ed. Mason, OH: South-Western Publishing, 2001 Spencer, Milton H. & Orlando M. Amos, Jr. Contemporary Microeconomics. 8th ed. New York: Worth Publishers, 1993 Stoddard, Chris. Charles M. Tiebout: A Pure Theory of Local Expenditures, 1956, Center for Spatially Integrated Social Science. Accessed December 19, 2009 at http://www.csiss.org/classics/content/43 Virginia HOT lanes Capital Beltway, FAQ. Accessed 19 December 2009 at http://virginiahotlanes.com/documents/transurban%20FAQ-HOT%20Lanes%20and%20Tolling%20061109.pdf Wolfram, Gary. Lectures on Public Choice Economics. Hillsdale College. Hillsdale, MI. November - December 2008. Accessed 19 December 2009 at http://www.associatedcontent.com/article/1292972/the_tiebout_model_of_local_government_pg3.html?cat=9 Read More