Compare and contrast a centralized versus a decentralized government. Include a discussion of the Tiebout Model.

A federal system consists of different levels of government that provide public goods and services and have some scope for making decisions. The subject of fiscal federalism explores “the roles of the different levels of government and the ways in which they relate to one another” [Oates, 1999, p. 1120]. One federal system is more centralized than another when more of its decision-making powers are in the hands of authorities with a larger jurisdiction. The most common measure of the extent to which a system is centralized is the centralization ratio, the proportion of total direct government expenditures made by the central government.

With a centralized government choices on gov’t services are made nationally. People vote on the amount and the different kinds of services to be supplied at locations. In a decentralized government they are made by the majority rule. Which reflects the median voter’s most preferred outcome. The preferences from these voters can vary significantly across different locations. The tiebout model says that people will choose to live in areas where the government satisfies their needs for public services as long as they can go to different cities whenever they want to. However some citizens might have to settle for a 2nd choice of residence if a community has too many residents. The tiebout model is mostly useful when describing mobility in local geographic areas that sets up a large labor market.

Centralized government has more of its decision making power at the central level in the hands of authorities with a larger jurisdiction. Decentralized government has more distributed responsibilities to state and local government. Disadvantages of decentralized government are intercommunity externalities, forgone scale economies in the provision of public goods, inefficient taxation, and lack of ability to redistribute income. Advantages of decentralization are the ability to alter the mix of public services to suit local tastes, the beneficial effects of competition among local governments, and the potential for low-cost experimentation at the subfederal level.

Centralized governments make choices for individuals on a national level. Decentralized governments make choices by majority rule on a local level. The major difference between the two forms of government is that with decentralized governments individuals have the opportunity to vote on conditions that will affect them directly. The Tiebout Model demonstrates how individuals make decision based on personal preference and what’s in his or her best interest. Example: I reside in a town where 56% population is married with children. I can recall this past local election, where individuals voted to approve additional local taxes known as spost taxes that would be used to fund building a new high school. This is an example of decentralized government, and how individuals in this area voted and approved additional taxes for the benefit of their children.

Tiebout model will work if there are a large number of communities offering different levels of local public goods. It argues that as people sorted or “voted with their feet” to choose their most preferred community and they would reveal their demand for the public goods thus overcoming the fundamental of governments from choosing optimal public goods levels. There are various assumptions based on which this model would work. It assumes that

– consumers are perfectly mobile

– full information

– large number of communities

– no spillovers among communities

– average cost of providing public goods as a function of population is U-shaped, i.e. there exists a cost minimizing population size

– communities with population sizes below (above) the cost minimizing size seek to expand (contract)

Tiebout asserted that under these assumptions, efficient provision of public goods would happen.

References:

Harvey S. Rosen. (2004). Public Finance, 7th Edition. The McGraw-Hill Companies.

Oates, Wallace E. “An Essay on Fiscal Federalism.” Journal of Economic Literature 37 (September 1999), pp. 1120–49.

Compare and contrast a centralized versus a decentralized government. Include a discussion of the Tiebout Model Answer