2. Schools as Local Public Goods (Browse O’Sullivan, Ch. 17) © Allen C. Goodman 2006

3. Schools in an Urban Setting Schools are provided through public funds. Generally the biggest biggest tax users. How does this work in an urban setting? What do we want to explain?

4. Schools in an Urban Setting How much is provided? How is it paid for? Who gets it? We’ll use the model of a public good. What’s a public good?

5. Schools in an Urban Setting Within an area, citizens are taxed, typically with a property tax. They pay the taxes, and then they have to decide how much they want. They all get the SAME amount

6. Bread and Schools Suppose that we live in a suburb. Suppose there are 10 residents. Each one earns $30,000. They can spend it on bread, or schools. 30 Bread Schools Prefers Bread Prefers Schools

7. Bread and Schools They have to pick a tax level that each one of them will pay. If they decide on $2,000, each will pay $2,000. 30 Bread Schools Prefers Bread Prefers Schools

8. Bread and Schools Let’s add a few more “identical” people. 30 Bread Schools We have five possible levels of “schools” s1s1 s2s2 s3s3 s4s4 s5s5

9. Bread and Schools Alternatively, individuals 1-5 are willing to give up different amounts of bread to get school resources. 30 Bread Schools We have five different levels of taxes. s1s1 s2s2 s3s3 s4s4 s5s5

10. How do we decide? Consider a politician. She has to win an election, and she has to get enough votes by promising the right amount of school resources 30 Bread Schools Suppose she promises s 5. Person 5 is happy (he didn’t want much). But everyone else wanted more. So politician loses election 4-1. s1s1 s2s2 s3s3 s4s4 s5s5 1 2 3 4 5

11. How do we decide? 30 Bread Schools Suppose she promises s 4. Persons 1, 2, and 3 are happier because they’re getting closer to what they want. But she’ll still lose 3-2. s1s1 s2s2 s3s3 s4s4 s5s5 1 2 3 4 5 Suppose she now promises s 3. She’ll win the election because Persons 1 and 2 are happier yet, and Person 3 is happiest, he’s getting exactly what he wants.

12. If you don’t believe me... 30 Bread Schools Suppose another politician promises s 2. Person 3 won’t be happy anymore because you’re providing MORE school resources than he wants … so he’ll vote against it. KEY POINT !!! The median voter is decisive. Eq’m school will be at s 3. Each voter will pay b 3 in taxes and get s 3. s1s1 s2s2 s3s3 s4s4 s5s5 1 2 3 4 5 b3b3

13. What does median voter model say? If you have some number of jurisdictions, one can argue that the levels of schools, fire protection, police protection are broadly consistent with consumer preferences. Is it perfect? –No, not all citizens vote. –If there are a lot of issues, the same citizen is not likely to be the median voter on every issue.

14. Tiebout Model You have a bunch of municipalities. Each one offers different amounts of public goods. Consumers can’t adjust at the margin like with private goods, but...

15. Tiebout Model They vote with their feet. If they don’t like what’s being provided in one community, they move to another.

16. Tiebout Model Assumptions –Jurisdictional Choice -- Households shop for what local governments provide. –Information and Mobility -- Households have perfect information, and are perfectly mobile. –No Jurisdictional Spillovers -- What is produced in Southfield doesn’t affect people in Oak Park. –No Scale Economies -- Average cost of production does not depend on community size. –Head Taxes -- Pay for things with a tax per person. We get an equilibrium. People’s preferences are satisfied.

17. Tiebout Model Critique –People aren’t perfectly informed. –There may not be enough jurisdictions to meet everyone’s preferences. –Income matters. Someone from Detroit cannot move to Bloomfield Hills to take advantage of public goods in Bloomfield Hills. –Where you work matters. –It’s probably a better model for suburbs than for central cities.