South-Western College Publishing - Economics  
Taking the Bull by the Horns Can Cost States Plenty
Topic Market Failure, Regulation, and Public Choice
Key Words

Tiebout, Voting With the Feet, State Regulation

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Reference ID: A144420021
News Story

Recent state efforts to enact health insurance legislation, environmental restrictions and to create incentives to engage in scientific research are noble, and such efforts reflect impatience with the federal government's inability to carry out these vital activities. But states incur disproportionate costs by taking the bull by the horns on such issues.

In his seminal Journal of Political Economy paper published in 1956, Charles Tiebout argued that multiple tiers of government existed to provide individuals with their best (or near-best) mix of public and private consumption levels. If you value parkland and high levels of public education, you will live in an area with (local or municipal) property taxes that provides such amenities.

Local governments provide public goods like education, snow removal, fire protection, etc, because those goods require an understanding of personal preferences that the federal government, for obvious reasons, could not provide. The Federal government, on the other hand, provides goods like national defense, postal service, etc, because the size of the enterprises for the entire country allow economies of scale and scope. The federal government can provide these services more cheaply and efficiently than local governments, working on their own, ever could.

But there's the rub. Local - and state - governments cannot, and, in economic logic, should not, take on national issues because of the way incentives get skewed by local efforts. The state government of Massachusetts recently offered legislation ensuring that all individuals in the state have access to medical care. But unless many other states around it enacted similar legislation, then individuals with health problems and no access to health care may have an incentive to move to Massachusetts. And that would be expensive for the government, perhaps requiring them to raise taxes to finance the plan. And that would drive others out of the state. People begin to, in Tiebout's words, "vote with their feet."

Maryland will have a similar problem, as it recently offered state funds for basic stem cell research. While the state will bear the costs, the return to such research will be global in nature. Maryland will see only a fraction of the benefits generated by the research it has funded. So why do it? It's best left to the national government, or to a consortium of multiple national governments to provide for such goods.

Questions
1.

Think of the types of taxes charged at each level of government. How does the elasticity of the tax base affect the decision of which tax to assess at each level of government to provide these goods?

2. Does the article suggest that, all else constant, the US government should not have walked away from the Kyoto Protocol, an international agreement to combat global warming? Why or why not?
Source Frank, Robert. "State Governments Overreach in Taking on Problems Best Solved at the National Level." The New York Times, 04/13/2006
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