Tiebout hypothesis

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The hypothesis asserts that economic efficiency will be attained in an economy with local public goods. Charles Tiebout (1924–1968) observed that market failure arises with public goods because of the difficulties of information transmission that prevent the true valuation of a public good by a consumer being observed. If there are a number of alternative communities (or jurisdictions) in which a consumer can choose to live and these differ in their provision of local public goods, then the consumer's choice of location provides a very clear signal of preferences. The chosen location is the one offering the provision of local public goods closest to the consumer's ideal, and through community choice preference revelation takes place. It follows that if there are enough different types of community and enough consumers with each kind of preference, then all consumers will allocate themselves to a community that is optimal for them and each community will be optimally sized. This ensures that the market outcome is efficient. It can be said that consumers reveal their preferences by ‘voting with their feet’ and this ensures the construction of efficient communities. The practical relevance of the Tiebout hypothesis has been much debated. One perspective is that it is another demonstration of the success of markets in allocating resources. An alternative perspective is that it is simply an empty demonstration of what is possible under unrealistic assumptions. The hypothesis has received some empirical support through evidence that there is partial sorting of similar consumers into communities. In any case, the hypothesis has been very influential in shaping discussion of decentralization of public good provision.

Subjects: Economics.

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