EXAM 2 Chapter 8 Diversity versus Segregation Sorting for Local Public Goods o In cities in the US there is substantial segregation with respect to income and educational attainment o In the typical metropolitan area there are dozens of municipalities each with a different mix of local public goods and taxes o The wide variety of municipalities and school districts allows citizens to vote with their feet choosing the jurisdiction with the best combination of public services and taxes Variation in Consumption of the Taxed Good o The introduction of taxes that vary across individuals increases the equilibrium number of municipalities o Real municipalities don t tax heads but instead use property taxes to finance local public goods o The basic logic of sorting with respect to head sizes applies to taxation based on housing consumption o People who own relatively expensive houses have an incentive to form municipalities with other big house citizens in order to avoid paying more than their share of taxes o The sorting of households with respect to the demand for local public goods and the demand for taxed goods contributes to income segregation Neighborhood Externalities Interactions among neighbors generate neighborhood externalities o o Externalities cause inefficiency An externality is an un priced interaction and it can be positive or negative A positive externality occurs when a person is not compensated for an action that benefits someone A negative externality occurs when a person does not pay for an action that imposes a cost on else someone else o Children imitate adults and a neighborhood of educated and successful adults provides good role models o for kids positive externality In schools the most important factor in student learning is the peer group Kids learn more when they are surrounded by other kids who are motivated and focused o An important facet of children s externalities is imitative or self reinforcing behavior o Imitation occurs for 3 reasons There is a psychological payoff from behaving like others A group provides a wider set of opportunities For example a chess club or a drama club will provide opportunities to interact with other high achievers A group generates better information about future opportunities For example college recruiters target high achieving students in chess and drama clubs o In addition to regular social interactions adults may get better information about job opportunities from their neighbors o On the negative side drug abuse among neighbors generates an unpleasant living environment o These neighborhood externalities affect a household s choice of a neighborhood o The positive externalities generated by a household generally increase with income and education level so people generally prefer neighborhoods with large numbers of high income educated households Neighborhood Choice neighborhood o Households compete for places in a desirable neighborhood by bidding for housing and land in the Segregation Equilibrium o Equilibrium requires that all households in a particular neighborhood pay the same rent If they didn t landowners with low prices would have an incentive to raise them and households on expensive land would have an incentive to change locations o Self reinforcing changes lead to extreme outcomes Self reinforcing change is an increase in the number of high income households This change makes the neighborhood even more attractive to high income households and the extreme outcome is that all high income households locate in one neighborhood Integration as a Stable Equilibrium o The stability of integration is determined by the slopes of the premium curves o Low income households will outbid high income households so the number of low income households will increase at the expense of high income households o Any deviation from the integration outcome is self correcting not self reinforcing o Integration is stable because low income households are willing to pay more than high income households to live in a neighborhood with more high income households Mixed Neighborhoods o A third possibility is a mixed neighborhood with an income mix between perfect segregation and perfect integration o Prices adjust to generate locational equilibrium For equilibrium in the market for neighborhoods each type of household high income and low income must be indifferent between the 2 neighborhoods Lot Size and Public Policy o When high income households consume more lad integration is more likely o If both types of households occupy one unit of land high income households outbid low income households leading to segregation o Another way to think about the effects of lot size is to take the perspective of landowners who of course maximize their rental income If you have 2 unites of land to rent you can either rent to a single high income household for 8 or to a pair of low income households each paying 5 for a total of 10 The low income household pair is a better choice High income household loses the bidding battle because it competes against 2 low income households o This example illustrates the importance of land consumption in neighborhood choice and diversity If the difference in land consumption between the 2 types of households is large relative to the difference in the premium the low income household will have a larger premium per unit of land and integration will occur If the difference in land consumption is relatively small segregation will occur Minimum Lot Size Zoning and Segregation o Some local government use minimum lot size zoning to control land use o Under this policy the government specifies a minimum lot size for residential development and outlaws higher density o One of the consequences of this zoning policy is income segregation o Integration is a stable equilibrium when high income households occupy twice as much land as low income households Schools and Neighborhood Choice o In the typical metropolitan area educational achievement varies across schools o One measure of the educational attainment of a community is the share of the population that has a college degree The Educational Production Function o Another measure of education attainment in a neighborhood is the high school dropout rate o The education production function shows the relationship between inputs to the education process and educational achievement o Achievement is typically measured by scores on standardized cognitive tests o Achievement f H P T S