Saturday, April 10, 2004

Voting With Feet

Arguably the most important contribution to urban economics was by Charles Tiebout in 1956. Challenging the idea that "public goods" are a source of "market failure", Tiebout pointed out that there are, in fact, markets for local public goods. People shop for the packages they like best when selecting a place to live. This amounts to a "quasi-market", imparting demand signals to local governments.

The theory has been elaborated in recent years by economists Bill Fischel, Fred Foldvary and Robert Nelson, among others. We now know that demands for public goods show up in land value differences. Local school quality is one such auspicious market. Moreover, if it is a private community, developers benefit from market signals (and returns) when planning the best land use arrangements.

Whether a private community or a small city, leaders are most responsive to the wishes of homeowners who look to them to create the rules that protect home value, most people's biggest tangible asset.

So far, so good. What happens when big-city leaders try to fill the same role? Shades of Inglewood: San Francisco politicians now want to keep chain stores with eleven or more stores from setting up shop in any of selected SF neighborhoods. They argue that they are doing what they can to protect the cities prized neighborhoods.

What is wrong with this picture? Why not let the neighborhoods decide? Let them secede and hammer out their own rules. Top-down one-size-fits-all has never quite worked. Besides big-city politics is less likely to cater for local tastes and more likely to be hijacked in the name of various agendas that have little bearing on neighborhood life.