CHAP10_Gruber2e.pptVIP

State and Local Government Expenditures 10.3 Redistribution AcrossCommunities 10.2 Optimal Fiscal Federalism 10.1 Fiscal Federalism in the United States and Abroad Chapter 10 10.4 Conclusion optimal fiscal federalism The question of which activities should take place at which level of government. Fiscal Federalism in the United States and Abroad intergovernmental grants Payments from one level of government to another. Fiscal Federalism in the United States and Abroad Spending and Revenue of State and Local Governments property tax The tax on land and any buildings on it, such as commercial businesses or residential homes. Fiscal Federalism in the United States and Abroad Spending and Revenue of State and Local Governments Fiscal Federalism in the United States and Abroad Fiscal Federalism Abroad fiscal equalization Policies by which the national government distributes grants to subnational governments in an effort to equalize differences in wealth. Optimal Fiscal Federalism The Tiebout Model What is it about the private market that guarantees optimal provision of private goods that is missing in the case of public goods? Tiebout’s insight was that the factors missing from the market for public goods were shopping and competition. The situation is different when public goods are provided at the local level by cities and towns. Competition will naturally arise because individuals can vote with their feet: if they don’t like the level of public goods provision in one town, they can move to the next town. This threat of exit can induce efficiency in local public goods production. Optimal Fiscal Federalism The Tiebout Model The main message of the model is that competition across local jurisdictions places competitive pressures on the provision of local public goods. The Formal Model Optimal Fiscal Federalism Problems with the Tiebout Model The Tiebout model requires a number of assumptions that may not hold in reality: Individuals must not only want to vote with t