If the overwhelming majority of Californians want a socialist nanny-state, then that is okay with me. If Mississippians want zero government, low education levels and poor public health, that's fine with me as well. Sometimes people will say, "If you don't like X, (policy, law, politician) leave the country." That's not really feasible. When it comes to the state level, it's vastly more flexible. It's not perfectly ideal, even better would be decentralization to the city level which would allow for simpler Tiebout sorting. However, some programs rely on economies of scale, and are simply not feasible for the lowest level of government.
Here are the Tiebout assumptions
1. Mobile Consumers: Consumers are free to choose where they live. There are no costs associated with moving. Obviously there are costs associated with moving, but national mobility doesn't exist really. State does, and municipal certainly.
2. Complete information Obviously complete information is difficult, but it is easy to research social programs, tax levels, and public services. Ie- Property taxes, public school levels, etc.
3. Many Communities to chose from There's one nation. 50 states. Thousands of municipalities.
4. Commuting is not an issue The Tiebout model reflects more municipal living, not Federalism, so I ignore this one.
5. Public Goods do not spill over of benefits/costs from one community to the next This is an issue, particularly for municipalities. Suburbs are often free riders of city programs.
6. An optimal city size exists: Economies of scale Likewise to states.
7. Communities try to achieve "optimal size" Likewise to states.
8. Commuties are rational and try to keep the public 'bad' consumers away. This assumption reflects more the racial/monetary sorting within municipalities, and isn't really valid for state-to-state migration.
2 comments:
Lots of people have made this argument - a libertarian federal government would permit states to have as much (or as little) safety net as they want. Unfortunately is just isn't feasible. One of the many problems with the tiebout hypothesis, apart from the absurd assumptions, is adverse selection.
Lets say locality X decides to offer subsidized/free health care, and tax its residents appropriately. The problem is that this policy attracts heavy users of that service - unhealthy people who can't afford health care where they are currently. Those taxed to make up the difference leave because their burdens outweigh the rewards, and the locality fails. It is only the massive moving costs Tiebout assumes away - financial, social, and fixed costs - that reduce this problem.
Of course challenging the assumptions is like shooting fish in a barrel. Moving costs aren't close to zero, we don't have infinite states or localities, complete information is a myth (and even if it existed the transaction costs from gathering/sorting/sifting it would limit its value - bounded rationalism), externalities are everywhere, positive and negative.
Nice in theory, useless in reality.
I don't think it's useless in reality. None of the assumptions are absolutely true, but I think they are partially true. The fact that moving costs are not zero doesn't change the fact that people sort themselves due to demand for public goods, etc.
Your points about adverse selection are a valid concern, but I don't think it's a problem. First, moving costs are not zero, and thus those poorer with a larger demand for say, health care, will not entirely move into the environment.
Second, adverse selection with health care is a concern, but I don't think it's a deal breaker. People decide where to live on a lot of things- New York may offer public health insurance, but NYC, for example, still has a lot of other public goods in demand. I think the income elasticity of public goods is over 1.
Thirdly, the Tiebout model applied to states somewhat eliminates the free ridership problem. You can't really use most California public goods unless you are a resident. For non-discriminatory public goods, that is key.
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