In this chapter, the following content will be discussed: In a federal system of government, different governments provide difference services, although advantages and disadvantages of centralized government exist; the club model of community formation indicates that community size and quantity of public goods depend on tastes; according to the Tiebout model, a Pareto efficient allocation of public goods is possible under certain conditions through “voting with your feet”;. | PUBLIC FINANCE IN A FEDERAL SYSTEM Chapter 22 Background Federal system Fiscal federalism Centralization Centralization ratio = Central government expenditures Total government expenditures 22- Distribution of All . Expenditures by Government Level 22- Source: Figures for 1900 through 1980 are from Pommerehne [1977]. Figures after 1980 are computed from various editions of the US Bureau of the Census, Statistical Abstracts of the United States , and from US Bureau of the Census [2012b]. Community Formation Club – voluntary association of people who band together to finance and share some benefit Optimal Club (or community) 22- The Tiebout Model Voting with your feet Tiebout’s assumptions Government activities generate no externalities Individuals are completely mobile People have perfect information with respect to each community’s public services and taxes There are enough different communities so that each individual can find one with public services | PUBLIC FINANCE IN A FEDERAL SYSTEM Chapter 22 Background Federal system Fiscal federalism Centralization Centralization ratio = Central government expenditures Total government expenditures 22- Distribution of All . Expenditures by Government Level 22- Source: Figures for 1900 through 1980 are from Pommerehne [1977]. Figures after 1980 are computed from various editions of the US Bureau of the Census, Statistical Abstracts of the United States , and from US Bureau of the Census [2012b]. Community Formation Club – voluntary association of people who band together to finance and share some benefit Optimal Club (or community) 22- The Tiebout Model Voting with your feet Tiebout’s assumptions Government activities generate no externalities Individuals are completely mobile People have perfect information with respect to each community’s public services and taxes There are enough different communities so that each individual can find one with public services meeting her demands The cost per unit of public services is constant so that if the quantity of public services doubles, the total cost also doubles Public services are financed by a proportional property tax Communities can enact exclusionary zoning laws—statutes that prohibit certain uses of land 22- Tiebout and the Real World Critique of Tiebout Empirical tests 22- Optimal Federalism What is the optimal allocation of economic responsibilities among levels of government? Macroeconomic functions Microeconomic functions 22- Disadvantages of a Decentralized System Efficiency issues Externalities Local public good Scale economies in provision of public goods Inefficient tax systems Scale economies in tax collection Equity issues 22- Advantages of a Decentralized System Tailoring outputs to local taxes Fostering intergovernmental competition Experimentation and information in locally provided goods and services 22- Implications Purely decentralized
