1. The federal government regulates and subsidizes states and localities. It subsidizes them through both matching and block grants for specific purposes. In the past, it also provided general revenue sharing. In matching grants, the amount received by states and localities depends on the amount they spend. Indirect aid is provided by the exemption from taxation of interest on state and local bonds and the tax deductibility of state and local income and property taxes.
2. The arguments favoring local over federal provision of public goods are that local governments will be more responsive to the community's needs and preferences and have greater incentives to provide services efficiently. But differences in the way that state and local …show more content…
Local public goods are public goods whose benefits are limited to those living in a particular locality. The Tiebout hypothesis postulates that competition among communities results in an efficient provision of local public goods. The reasons why federal intervention may be required include market failures (externalities, particularly those associated with choice of location, and limited competition) and redistribution (the limited ability to redistribute income at the local level).
4. There are marked disparities in income per capita and in the provision of local public services across states and localities. Whether government policy should be directed at reducing inequalities across communities (rather than inequalities across individuals) is debatable.
5. Matching grants are more effective in encouraging expenditures in the direction desired, but there is a deadweight loss associated with their use. Although traditional theoretical arguments suggest that block grants, even for specific purposes, should have just income effects, and thus be equivalent to equal direct grants to the members of the community, the empirical evidence suggests the presence of a flypaper effect.
6. Tax subsidies, including the tax exemption of interest on local and state bonds, lead to increased expenditures on publicly provided goods and increased capital investment by state and local
2. The arguments favoring local over federal provision of public goods are that local governments will be more responsive to the community's needs and preferences and have greater incentives to provide services efficiently. But differences in the way that state and local …show more content…
Local public goods are public goods whose benefits are limited to those living in a particular locality. The Tiebout hypothesis postulates that competition among communities results in an efficient provision of local public goods. The reasons why federal intervention may be required include market failures (externalities, particularly those associated with choice of location, and limited competition) and redistribution (the limited ability to redistribute income at the local level).
4. There are marked disparities in income per capita and in the provision of local public services across states and localities. Whether government policy should be directed at reducing inequalities across communities (rather than inequalities across individuals) is debatable.
5. Matching grants are more effective in encouraging expenditures in the direction desired, but there is a deadweight loss associated with their use. Although traditional theoretical arguments suggest that block grants, even for specific purposes, should have just income effects, and thus be equivalent to equal direct grants to the members of the community, the empirical evidence suggests the presence of a flypaper effect.
6. Tax subsidies, including the tax exemption of interest on local and state bonds, lead to increased expenditures on publicly provided goods and increased capital investment by state and local