ECONOMICS OF THE
METROPOLITAN AREA
212G, SPRING 2013
Professor: Keren Mertens Horn
Office: Wheatley 5-78B
Office Hours: TR 2:30-4:00 pm
E-mail: Keren.horn@umb.edu
CLASS UPDATES
 Thursday – Draft of Final Paper Due (everyone must hand in
INDIVIDUAL assignments)
 I will be accepting another revision of Assignment 2 or
Assignment 1 up until May 9 th
 Discussion Section Thursday Business Improvement Districts –
Erik Benson, Roudy Bernadin, Andrew Cho
 Discussion Questions:
 Are BIDs democratic? - Roudy
 Are BIDs accountable? - Andrew
 Do you think it was a good idea to form a BID here in Boston ? - Erik
 Final Debates:




Gun Control – May 7 th
Stop and Frisk – May 9 th
Schools – May 14 th
Everyone is required to attend all 3 debates, or will lose a full grade
on their final
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BRINGING IT ALL TOGETHER
 Why do cities exist?
 How do we get around in cities? What are the costs/benefits
of these alternative modes?
 What determines the value of land in cities?
 How is land used in cities?
 How is land governed in cities?
 Why are urban schools failing? How are we addressing these
challenges?
 Why are our cities racially segregated? Should we care about
this problem?
 How do we make our cities safer? What factors have led to
the long term decline in crime?
 Is there a role for the government in the housing market?
 TODAY – What are local governments and do we need them?
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LOCAL GOVERNMENTS
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LOCAL GOVERNMENTS
 There are lots of local governments!
 Most Metropolitan Areas have very fragmented governments
 Typical MSA looks like this:
 114 Local Governments (2 Counties, 42 Municipalities, 21 School
Districts, 49 Special Districts)
 Local governments derive their power from state governments,
and there is large variation in amount of power that state
governments turn over to local governments.
 In developing countries we see fewer local governments.
 On average local government share of total government spending is
around 32 percent in industrialized countries vs. 15 percent in the
developing world.
 In recent years there has been more of a push towards fiscal
decentralization (pushing spending down towards local governments)
in developing countries.
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LOCAL GOVERNMENTS
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BOSTON’S REVENUES
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LOCAL GOVERNMENTS
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BOSTON’S BUDGET
Boston Expenditures, Projected Budget 2014
Total Dollars
Education
Share of Total
Spending
1,127,345,887
43.4%
Administration and Finance
374,738,152
14.4%
Police Department
289,433,908
11.1%
Fire Department
194,301,950
7.5%
Public Works
163,488,918
6.3%
Public Property
132,917,587
5.1%
Public Health
110,930,718
4.3%
Housing and Neighborhood Development
76,130,884
2.9%
Human Services
53,475,710
2.1%
Transportation
46,552,623
1.8%
Environment and Energy
20,590,168
0.8%
Economic Development
4,465,000
0.2%
Advocacy and Strategic Investment
2,963,652
0.1%
2,597,335,157
100.0%
Total Expenditures
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ROLE OF LOCAL GOVERNMENTS
 Not involved in macroeconomic policy
 Do not set interest rates or issue currency
 Not involved in too much income redistribution
 Largest income redistribution programs are funded at the federal
level, but often administered at the local level
 Are involved in resource allocation
 Local governments provide a wide range of services, either through
direct provision or funding (or subsidizing) a non governmental
supplier.
 Examples:




Education
Police
Fire Protection
Parks
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WHY SHOULD LOCAL GOVERNMENT DO
THESE JOBS?
 Local Governments are generally defended through efficiency
arguments.
 Three main sources of market failure are used to support a role for
local government in the allocation of particular resources:
 Natural Monopoly
 Ex/Case of Mass Transportation
 Externalities
 Ex/Pollution and Congestion
 Local public goods
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LOCAL PUBLIC GOODS
 Public Goods:
 Non-rival in consumption
 Non-excludable: impractical to exclude those who do not pay
 Local Public Goods:
 Benefits confined to small geographical area
 Ex/Street Lights
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LOCAL PUBLIC GOODS
 What is the socially optimal price of a public good?
 Remember marginal cost of one additional consumer is zero (in the
case of a non-rival public good)
 Optimal price = 0
 Only a government, that has the ability to cover costs through
mechanisms not related to use of the public good, can provide the
right amount.
 How does a government determine the right amount of a local
public good?
 Cost/Benefit Analysis
 Benefits = sum of marginal benefits for all individuals (vertical sum of
individual marginal benefit curves)
 Costs = costs of provision, including opportunity costs
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LOCAL PUBLIC GOODS
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LOCAL PUBLIC GOODS
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LOCAL PUBLIC GOODS
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HOW DO LOCAL GOVERNMENTS DECIDE
HOW MUCH TO PROVIDE?
 Voting – hold an election and let voters decide
 Median Voter result: if spending level for public good is determined
by majority vote, then the winning budget will be the preferred
budget of the median voter.
 Ex/Impose a $20 dollar tax and hold a series of elections
 This may not be the efficient outcome (part of the problem is that voting
does not take into account intensity of preferences)
 Outcomes from elections can be highly inefficient when preferences are
heterogeneous (diverse)
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OTHER OPTIONS TO DETERMINING
AMOUNT OF LOCAL PUBLIC GOOD
 “Voting with your Feet” – Tiebout Model
 In the U.S. we have many local governments
 When citizens disagree about how much of a local good to provide,
they can “vote with their feet” and move to a jurisdiction with like
minded people
 This type of “voting” can prevent the inefficiencies associated with
the median voter result
 Empirical support – Fisher and Wassmer show that the greater the
variation across households in the underlying demand for local public
goods in a metropolitan area, the larger the number of municipalities
and school districts in the metropolitan area.
 Though increasing the number of local governments could increase
efficiency when there is diversity in preferences, it can also lead to
inequities (ex/Education)
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BENEFITS TAXATION
 Rather than eliminate diversity in a district an alternative
approach is to match the diversity in demand with diversity in
tax liabilities.
 Lindahl approach – taxes are proportional to the willingness to
pay for local public goods.
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BENEFITS TAXATION
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BENEFITS TAXATION
 Rather than eliminate diversity in a district an alternative
approach is to match the diversity in demand with diversity in
tax liabilities.
 Lindahl approach – taxes are proportional to the willingness to
pay for local public goods.
 If there was any way for the government to accurately
determine a voter’s willingness to pay, then this approach may
work, but in reality the government would not be able to get
voters to reveal their true willingness to pay if their tax liability
rested on it.
 In some cases, such as fire protection, benefits may be roughly
proportional to your property value, and in this way a property
tax could serve as a rough benefit tax.
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HOW ELSE COULD WE DEAL WITH
DIVERSIT Y IN DEMAND?
 Maybe certain populations that demand additional services
will pay for additional services?
 In the case of Business Improvement Districts (BIDs),
businesses vote to pay additional taxes which will pay for
private provision of these local public goods (Public/Private
Partnership)
 BIDs – privately directed, publicly sanctioned organizations that
supplement public services within geographically defined boundaries
by generating multiyear revenue through a compulsory assessment
on local property owners and/or businesses.
 Thursday we will discuss BIDs and the debates about their
formation.
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WHY SHOULD LOCAL GOVERNMENT DO
THESE JOBS?
 Local Governments are generally defended through efficiency
arguments.
 Three main sources of market failure are used to support a role for
local government in the allocation of particular resources:
 Natural Monopoly
 Externalities
 Local public goods
 Arguments against local governments are made both on the
grounds of efficiency and equity.
 Efficiency
 Economies of scale may arise from provision of a good at the state or
national level
 A larger level of government may better internalize an externality
 Equity
 Can lead to an inequitable distribution of resources if rich live in suburbs
and poor in central city
 Can lead to greater segregation (by race or income)
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