Local Residential Sorting and Public Goods Provision:
A Classroom Demonstration
Keith Brouhle, Jay Corrigan, Rachel Croson, Martin Farnham, Selhan Garip,
Kenyon College
Luba Habodaszova, Laurie Johnson, Martin Johnson, and David Reiley
Introduction
The Demonstration
Students in undergraduate public finance courses learn that markets generally underprovide public goods due to the nonexcludable and nonrival nature of those
goods. But centralized government provision of locally-consumed public goods may also be inefficient due to heterogeneous preferences. This classroom
exercise illustrates the Tiebout hypothesis that residential sorting across multiple communities leads to a more efficient allocation of local public goods (Journal
of Political Economy 1956). The exercise also demonstrates problems that arise when certain assumptions of the Tiebout model are not met. By allowing
students to uncover the subtleties of the model themselves, this demonstration helps students develop a richer understanding of the model’s real-world implications and the importance of its underlying assumptions. The classroom initially comprises a single community of students with heterogeneous preferences for a
public good (dorm parties); the students determine the level of taxation to be used for public good provision via a simple voting mechanism. Next, the classroom
divides into two dorms, each of which determines its own level of public good provision. Then the students have the opportunity to relocate to the dorm where
the bundle of public goods and taxes better suits their tastes. At first some students must stay in their original location, but in the final treatment all students are
free to move. After each round of sorting, each dorm determines a new level of public good provision. Students see how welfare rises as sorting becomes more
complete. This game highlights the usefulness of markets in general and the assumptions necessary for a well-functioning market to reach an efficient outcome.
The third round of the exercise may foster classroom discussion about “white flight” from inner-city school districts, as it shows how some immobile individuals
become worse off when mobile individuals move.
The classroom demonstration takes about thirty minutes, which leaves time for class discussion afterward. The demonstration will work in classes with as few as
six students or as many as 100 students. While designed primarily for a public finance course, the exercise can be used in any course that covers government
provision of public goods. The demonstration follows students through four years of college as they choose (or are assigned) a dorm in each successive year. The
only thing that differentiates students is their preferences regarding dorm parties, a local public good. And since each dorm’s residents determine the size of their
dorm’s party budget, the dorms differ only in the bundle of taxation and public good provision offered. At the beginning of the exercise, each student receives a
color-coded packet of materials (available from the presenter). Students with blue instructions are High Valuers who value dorm parties at 2×T, where T is the
level of taxation dorm residents agree to. Students with red instructions are Low Valuers who value parties at 0×T. Each year, a dorm’s residents must
collectively choose a level of taxation T between $0 and $100 that each student will pay. These taxes are spent collectively to sponsor dorm parties. Since we
assume that a unit of dorm parties costs $1, for High Valuers the marginal benefit from contributing always exceeds the marginal cost, while for Low Valuers the
marginal cost always exceeds the marginal benefit. The two colors of packets should not be evenly distributed between the two sides of the classroom. For
example, two-thirds of the packets on the right side of the room should be red, while two-thirds of the packets on the left side of the room should be blue. Half of
the packets (both red and blue) should also contain a green ticket. This ticket determines whether students will be able to change dorms in Year 3.
Year 1
All students begin the demonstration as residents of one dorm. Using a
simple voting mechanism, they collectively determine that dorm’s level of
taxation and subsequent public good provision.
Year 2
Year 3
The instructor breaks the class up into two dorms, one made up predominately of High Valuers, the other made up predominately of Low Valuers.
Each dorm then determines its own level of public good provision. The
dorm made up largely of High Valuers should choose a level of taxation and
public good provision that is higher than that chosen by the other dorm.
Those students who were initially endowed with a green ticket are given the
option to move from one dorm to another. Each dorm again determines its
own level of public good provision. Taxation and public good provision
should rise in the High Value dorm and fall in the Low Value dorm.
One Dorm
Hi
Hi
Lo
Hi
Hi
Lo
Hi
Hi
Hi
Lo
Lo
Lo
Hi
Lo
Lo
Lo
Lo
Hi
Lo
Lo
Hi
Lo
Hi
Lo
Lo
$50 votes
4
Hi
$0 votes
13
Total votes
30
Tax level (T)
$50
Dorm after-tax welfare
30000
Year 1 social welfare = 30000
Left:
$100 votes
10
Hi
Lo
Hi
Lo
Hi
Hi
Lo
Hi
$50 votes
0
$0 votes
5
Total votes
15
$50 votes
0
Hi
Hi
Lo
Hi
# moving Left =
$0 votes
2
Right after-tax welfare
14853
Lo
Hi
# moving Right = 2
# moving Left =
2
Total votes
15
Left:
$100 votes
15
$0 votes
0
Total votes
15
$0 votes
15
Total votes
15
$50 votes
0
Right:
$100 votes
0
$0 votes
13
Lo
3
Right:
$100 votes
2
Right after-tax welfare
14833
Lo
Lo
Right:
$100 votes
10
Year 1 social welfare = 30000
Year 2 social welfare = 30166
Lo
Lo
Hi
Lo
Left after-tax welfare
16500
Right tax level (TR)
$13
Lo
Hi
Hi
Left after-tax welfare
15953
Right tax level (TR)
$33
Lo
Hi
Left after-tax welfare
15333
$50 votes
0
Lo
Hi
Lo
Left tax level (TL)
$100
Total votes
15
Hi
Hi
Left tax level (TL)
$87
$0 votes
5
Lo
Lo
Hi
Lo
Left tax level (TL)
$67
$50 votes
0
Lo
Lo
Hi
Lo
Left:
$100 votes
13
Hi
Lo
Lo
Hi
# moving Right = 3
$100 votes
13
Hi
Hi
Hi
Lo
Hi
Lo
Lo
Lo
Lo
Hi
Right
Lo
Lo
Lo
Hi
Hi
Lo
Hi
Lo
Hi
Hi
Hi
Left
Hi
Hi
Hi
Hi
Lo
Hi
Hi
Lo
Lo
All students are now free to move to whichever dorm best reflects their
preferences. Each dorm determines its level of public good provision one
last time. The predictions of the Tiebout model should be fully realized.
Right
Lo
Lo
Hi
Lo
Lo
Lo
Lo
Left
Hi
Hi
Hi
Hi
Hi
Hi
Hi
Hi
Lo
Lo
Right
Lo
Lo
Hi
Hi
Left
Year 4
Total votes
15
Year 1 social welfare = 30000
Year 2 social welfare = 30166
Year 3 social welfare = 30806
$50 votes
0
Right tax level (TR)
$0
Right after-tax welfare
15000
Year 1 social welfare =
Year 2 social welfare =
Year 3 social welfare =
Year 4 social welfare =
30000
30166
30806
31500
Topics for Discussion
 You may want to begin discussion by focusing on how individual and social welfare change over successive years. By the end of Year 4, most students
realize that when similar individuals sort into communities according to their taste for a public good, social welfare is maximized.
 You can then emphasize the implications of relaxing the model’s assumptions. What happens if there are more than two types of residents but only two
communities? Or what if a single household belongs to multiple local-public-good communities? Will efficient levels of provision be reached?
 You can also ask students to discuss their own experience with residential choice and the communities in which they have lived. How did their families
decide where to live? Did the quality of schools or other local public goods (e.g., fire protection, parks) play a role? Do they believe everyone in their
community wants exactly the same things from the local government? In other words, just how complete is the residential sorting they observe in the real
world?
 Perhaps most interesting is a discussion of the costless mobility assumption. Students should be able to come up with several reasons why moving might be
costly. Faced with such costs, some low-income residents will not be able to afford to move. Other residents may need to live near where they work. For
others, non-pecuniary costs may be more important. For example, many people value living near their relatives and friends, or simply don’t like having to
adjust to a new environment. In this case, sorting is incomplete and the equilibrium outcome is inefficient.