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Since the publication in 1956 of A Pure
Theory of Local Expenditures by Charles
Tiebout, economists studying local
governments have been fundamentally
concerned with the possibility that
consumer residential mobility among
competing local communities may lead to
efficiency in providing local public goods

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Tiebouts objective was to think of a way of
achieving efficient public goods provision and to
characterize the specific conditions under which
it would work
Tiebouts mechanism is easily stated
One factor individuals consider in choosing in
which community to live is the tax and service
package in the community
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Tiebouts assumptions are:
1. Consumers are mobile and will move their residence to the
community that best satisfies their preferences
2. Consumers are completely knowledgeable about the
differences in tax/ service packages among the communities
3. There are many communities from which to choose
4. There are no restrictions or limitations on consumer mobility
due to employment opportunities
5. There are no spillovers of public service benefits or taxes
among communities
6. Each community, directed by a manager, attempts to attract
the right size population to take advantage of scale economies
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Tiebout concludes that under these conditions
consumers will locate in the community that best
satisfies their preferences
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The Assumption
The first three assumptions should be familiar to student
of economics ! because these assumptions are the
parallel of he standard assumptions of a perfectly
competitive market
Consumers with complete knowledge of price and quality
differences face many sellers of each product and make
consumption choices in order to obtain the greatest
possible satisfaction
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In responding to this set of locational choices, there is
little doubt that consumers do consider local government
taxes and services in deciding where to live
Tiebouts assumption concerning scale economies
poses a problem because it requires that each
community attract just the right population to allow
production of public services at minimum average cost
The assumption of no employment restrictions on
residential mobility removes several potential problems,
including any difference in transportation cost between
job location and alternative residential location and the
new costs created by the need to change job location for
whatever reason
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The most important assumption for the efficiency
implications of the Tiebout model and yet the
most troublesome is the absence of externalities
or fiscal spillover
There are several ways of correcting for the
inefficiency caused by interjurisdictional
Externalities can be eliminated if governments are
Intergovernmental grant can be used to induce local
governments to change their amount of public service
to that which is socially efficient
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Property Taxes and Stability of the Model
A more fundamental criticism of the model that noting the
severity of the assumptions in the possibility that even if
the assumptions are met, the process may fail to provide
an efficient amount of local public goods
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Fiscal Zoning
The potential efficiency of the Tiebout mechanism may
be blocked if an individual can pay less than the average
cost of local public goods
If the public goods are to be financed by property taxes,
this is accomplished by consuming a less than average
value home
This difficulty would not arise if there was some method
of preventing the consumption of lover value housing in
a community
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The simple solution is to merely prohibit consumption of
housing with a value less than that of the original houses
in each community
Of course, such explicit value based zoning rules may
not be possible, so the question becomes one of
whether a set of rules defended for a nonexclusionary
reason such as safety effectively serves the same
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Fiscal Capitalization and Homogeneous
In using zoning to ensure that all residents of a
community desire not only the same amount of
public service but also the same value housing,
many homogeneous community are required
But if the tax advantage of a small house
consumer in a big house community is offset by
a higher price for that small house, a process
called tax or fiscal capitalization
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Implications and Limits of Capitalization
One important issue is whether this type of
capitalization occurs, and if so, whether it can be
However, capitalization might not be able to be
maintained because either the housing supply or
the number of communities might change
A final possibility where capitalization may not
occur arises if individuals in one community do
not value the additional government services
offered in another jurisdiction, even if taxes or
housing prices are lower
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The tiebout process serves to reduce the
variance in desired government service
within communities
If the differences are not eliminated, voting
is required and can be used to find a
compromise position within those
remaining differences of opinion
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