Public finance, Foldvary

Anderson, ch 20 local governments

Why communities, associations?

Economies of scale.


If clubs are sufficient for public goods, is there no need for government?

Definition of club. A voluntary organization that provides services to its members.

Voluntary: can exit as well as enter. Can be exclusive or not.

Can be exclusive by interest.

Intentional (not a club of females).

In economics: the club good is collective, non-rival.

Excludable collective goods. Club goods.

Bottom p. 563, “excludable public good.”

Club theory is also applied to governments.

If everybody belongs to one club, the population is partitioned, such as among countries.

Club theory.

Subject to congestion, although not always e.g. political party.

There is an exclusion method.

Two basic variables: members and size of good.

Can solve two unknowns with two equations.

Fixed costs lower with more members.

But more members have the cost of congestion, absent Camaraderie.

James Buchanan, model.

Optimal club: MC = MB p 567.

Types of membership:

homogenous - have some common characteristic.

heterogenous - different characteristics other than belonging to the club.

Club good can be fixed in amount, or variable.

Local public goods.

Model. Y output. X private good. G collective good.

N population and labor.

Y=f(N), 1st deriv +, 2nd neg.

f(N) = NX + G

X = (Y-G)/N

One more X implies less G by 1/N, graph p. 571

X = f’(N), the marginal product of labor = per capita output of X.

Henry George theorem p. 573

G = f(N) - Nf’(N)

The value of public good G = output minus wages.

Rent = output minus wages.

So R = G at the optimal provision.

The Henry George theorem, since HG theorized that G could be financed from R.

Henry George proposed a single tax on land value that could adequately finance government.

No deadweight loss.

If rent is not used, then X and labor are taxed instead, and there are distortions.

When to not decentralize p. 576

MC = 0; natural monopoly, one provider

But there are local natural monopolies.

National defense can be provided bottom up.


Externalities, but what matters is marginal externalities.

Can be provided bottom up.

Optimality cannot include subsidies to other communities?

Why not lump-sum subsidies?

Communities not optimal size?

Can have optimal provision of specific services.

P. 577 top, decentralization.

Communities as spacial clubs

The market for local public goods among communities.

Charles Tiebout 1956

Assume mobility, financing from property taxes (best, land tax).

People select the community set of club goods. They “vote with their feet”.

Competition among local governments results in an efficient allocation of public goods.

Induces product variety.

Homogeneity within communities for the distinguishing service

Heterogeneity among communities.

Private communities can specialize more.

Retirement community, Roosmoor.

Churches. Minority preferences, e.g. naturist clubs.

For it to work well, requires ability to start new communities.

In reality, mobility is costly.

Information is incomplete, but one can obtain it at a reasonable cost.

Despite reality being different, the model has some correspondence with reality.

Empirical studies have found capitalization of public goods and taxes into site values.

Olson p. 588