The Theory of Local Public Goods Twenty-Five Years After Tiebout: A Perspective / Joseph E. Stiglitz.

By:

Stiglitz, Joseph E

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0954.Publication details: Cambridge, Mass. National Bureau of Economic Research 1982.Description: 1 online resource: illustrations (black and white)Subject(s):

E - Macroeconomics and Monetary Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper asks, under what conditions can the Fundamental Theorem of Welfare Economics be extended to economies with local public goods? We show that there are some fairly restrictive sets of assumptions under which a competitive local public goods equilibrium (if it exists) is efficient; more generally, however, competitive local public goods equilibria may be inefficient in the allocation of individuals among communities, in the number of communities, and in the level and kinds of public goods provided. The primary sources of inefficiency are identified and analyzed; these "market" failures are closely related to some important policy issues concerning, for instance, urban concentralization, fiscal decentralization, and regional redistribution. In communities in which landlords control the public sector, the level and kinds of public goods provided may be incorrect, and what goods are provided are supplied inefficiently. In contrast, in communities in which renters control the public sector, there are no incentives for efficiency in the supply of public goods. Because of what we refer to as rental capitalization, there may in fact be perverse incentives with respect to the kinds of public goods or "bads" provided. Not only is it the case that not every competitive equilibrium is Pareto optimal, but not every Pareto efficient allocation can be sustained by a competitive local public goods equilibrium (with the appropriate lump sum redistributions) . Just as the Fundamental Theorem of Welfare Economics does not adequately reflect the vices and virtues of competition in the market economy with purely private goods, so too here: the virtues of a decentralized mechanism for providing public goods may be vastly underestimated by our analysis.

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Previous	nber w0951 Tax Effects on the Allocation of Capital Among Sectors and Among Individuals: A Portfolio Approach /	nber w0952 Long Run Trends in Patenting /	nber w0953 OSHA Enforcement, Industrial Compliance and Workplace Injuries /	nber w0954 The Theory of Local Public Goods Twenty-Five Years After Tiebout: A Perspective /	nber w0955 Taxes, Firm Financial Policy and the Cost of Capital: An Empirical Analysis /	nber w0956 Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compensation Comparisons /	nber w0957 Pension Funding, Pension Asset Allocation, and Corporate Finance: Evidence From Individual Company Data /	Next

August 1982.

This paper asks, under what conditions can the Fundamental Theorem of Welfare Economics be extended to economies with local public goods? We show that there are some fairly restrictive sets of assumptions under which a competitive local public goods equilibrium (if it exists) is efficient; more generally, however, competitive local public goods equilibria may be inefficient in the allocation of individuals among communities, in the number of communities, and in the level and kinds of public goods provided. The primary sources of inefficiency are identified and analyzed; these "market" failures are closely related to some important policy issues concerning, for instance, urban concentralization, fiscal decentralization, and regional redistribution. In communities in which landlords control the public sector, the level and kinds of public goods provided may be incorrect, and what goods are provided are supplied inefficiently. In contrast, in communities in which renters control the public sector, there are no incentives for efficiency in the supply of public goods. Because of what we refer to as rental capitalization, there may in fact be perverse incentives with respect to the kinds of public goods or "bads" provided. Not only is it the case that not every competitive equilibrium is Pareto optimal, but not every Pareto efficient allocation can be sustained by a competitive local public goods equilibrium (with the appropriate lump sum redistributions) . Just as the Fundamental Theorem of Welfare Economics does not adequately reflect the vices and virtues of competition in the market economy with purely private goods, so too here: the virtues of a decentralized mechanism for providing public goods may be vastly underestimated by our analysis.