Jurisdiction 1

Jurisdiction 3

Jurisdiction 2

The Tiebout hypothesis suggests that the problem of allocating local public goods can be solved by allowing people to sort themselves into homogeneous communities. Within these communities, each person is the median voter (because everyone's tastes are identical). This argument provides a rationale for allowing public goods to be provided at the local, not federal or state, level.

1. Assume that there exists a small region that is subdivided into three independent local political jurisdictions.

Building off of HW3, assume that there three types of individuals i = {1, 2, 3} residing within the region, each with the following demand for park space:

q1 = 100 - 2p

q2 = 110 - 2p

q3 = 126 - 2p

Assume also that the region contains nine individuals distributed evenly across type (i.e., there are three Type 1 people, three Type 2 people, and three Type 3 people). Individuals must choose from one of the three jurisdictions when picking a residence and each jurisdiction must house exactly three individuals in equilibrium (assume, for example, that the housing stock is limited to only three residences within each jurisdiction).

(a) If each jurisdiction were perfectly heterogeneous (i.e., each community contains one person of each type), what is the aggregate level of consumer surplus within the region? Assume, like in HW3, that each unit of park space costs $90 and the per-unit cost is split evenly across a jurisdiction's residents. Voters decide outcomes by majority rule. Please show your work rationalize your answer. 5pt

Hint: aggregate regional surplus is calculated by summing across all residents within the region

(b) Assume that each person sorted into a jurisdiction of like-minded individuals (i.e., each jurisdiction in now homogenous). What would the region's aggregate the level of consumer surplus be under this scenario? Does aggregate regional welfare improve, decline, remain unchanged? Again, outcomes are determined by majority rule. Please show your work rationalize your answer. 5pt