CHAPTER 22 Public Finance in a Federal System Copyright ? 2010 by the McGraw-panies, Inc. All rights reserved. McGraw-Hill/Irwin 22- 2 Background ? Federal system ? Fiscal federalism ? Centralization – Centralization ratio = Central government expenditures Total government expenditures 22- 3 Distribution of All . Expenditures by Government Level 22- munity Formation ? Club – voluntary association of people who band together to finance and share some benefit ? Optimal Club (munity) 22- 5 The Tiebout Model ? Voting with your feet ? Tiebout ’ s assumptions – Government activities generate no externalities – Individuals pletely mobile – People have perfect information with respect to munity ’ s public services and taxes – There are enough munities 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- 6 Tiebout and the Real World ? Critique of Tiebout ? Empirical tests 22- 7 Optimal Federalism ? Macroeconomic functions ? Microeconomic functions 22- 8 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- 9 Advantages of a Decentralized System ? Tailoring outputs to local taxes ? Fostering petition ? Experimentation and information in locally provided goods and services 22- 10 Implications ? Purely decentralized systems cannot maximize social welfare ? Dealing munity activities that create spillover effects that are not national in scope – munities under a single regional government – Pigouvian taxes and subsidies ? Division of responsibility in public good provision ? Distri
