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Article Summary

Tiebout, Charles 1956. A Pure Theory of Local Expenditures, Journal of Political Economy 64:416-424.

Public goods are non-rival and non-exclusive. Therefore, determining the optimal amount of expenditure on public goods presents an interesting problem. In this article, Charles Tiebout employs the theory of public choice. He argues that residents of localities are similar to consumers, because they are essentially shopping between different municipalities to find the one that has the right mix of taxes and public services.  Their ability to choose leads towns to compete against one another, and that competition means that the towns are better able to discover and serve the needs of their citizens.  This theory ensures that municipalities do not overproduce public goods, thereby wasting valuable local resources. 

Tiebout assumes that there are n local public goods and there are m communities.  Each community would go to the national market and bid for appropriate units of each public good. The demand for each public good would then be the sum of demands of all the m communities for each of the n goods. This total demand is the revealed preference of the community.

The model also assumes that there is an optimal level of population for each community, depending on some fixed resource, the beach space for example. Beyond this optimum number, an individual would have to look for the next best community that fits his or her preferences. Economic forces would automatically push people out of a city that has exceeded its optimum size and pull people in when the optimum population has not been reached. Hence spatial mobility provides a way to determine the level of public goods.

In his explanation of how potential residents choose communities, Tiebout assumes there are no restrictions on job locations, and all residents have full mobility and access to information about services in all communities.  In order to provide a perfectly competitive market, each town would have a fixed revenue scheme and the number of towns would be limitless in order to provide a full range of choice for all desired combinations of taxes and public goods.

Tiebout also makes several suggestions for policy implication at the end of the article.  He suggests that integration of municipal services between neighboring metropolitan areas is justified under certain conditions: if services are not reduced and costs remain the same.  In addition, he advocates policies that increase knowledge of residents and encourage their mobility.