Notes Ch 8 PDF

Preview

Summary

Chapter 8 Notes
Karl Storchman Fall 2019...

Description

Chapter(8:(Location(Choices! !!

( A.(Neighborhood(Quality(and(Location(Choices(( People choose a certain neighborhood to live in according to its objective or perceived quality. Relevant!factors!can!be!crime!rates,!public!schools,!housing!prices,!ethnical!characteristics!! etc.!Here!is!a!link!that!that!reports!the!perceived!quality!of!a!neighborhood!in!New!York!City! (numerous!characteristics!over!time):!(You!need!to!have!a!flash!driver!installed)! http://www.nytimes.com/interactive/2009/03/07/nyregion/20090307-nyc-poll.html! ! Here!is!also!report!“State!of!New!Yorkers!–!A!Well-Being!Index”!with!neighborhood!ranking! for!certain!criteria:! https://www1.nyc.gov/assets/cidi/downloads/pdfs/nyc_well_being_index_full_report_2015 .pdf! ! Here!is!an!interactive!map!of!actual!crime!in!New!York!City:! http://projects.nytimes.com/crime/homicides/map! https://maps.nyc.gov/crime/! ! ! Here!are!more!NYC!neighborhood!data/maps:! http://www.nyc.gov/html/dcp/html/neighbor/index.shtml! ! Median!Income!by!Subway!line!and!stop! http://www.newyorker.com/sandbox/business/subway.html! ! Here!is!NYC’s!Rat!Indexing!website.!It!quantifies!rodent!intensities!by!Community!Districst! (CD):!!http://www1.nyc.gov/site/doh/data/health-tools/rat-maps-and-data-ratindexing.page! ! ! Here!is!a!video!clip!how!rats!took!over!a!KFC/Taco)Bells!in!the!Village:! http://www.youtube.com/watch?v=su0U37w2tws ! ! !

( B.(Residential(Income(Segregation(Index(RISI! ! Many!neighborhoods!in!U.S.!cities!are!highly!segregated!by!income,!race,!educational! attainment!level!etc.!Here!is!a!link!that!reports!the!racial-make-up!of!NYC!neighborhoods! and!their!changes!over!time:! http://www.nytimes.com/interactive/2011/01/23/nyregion/20110123-nyc-ethnicneighborhoods-map.html?scp=3&sq=race%20new%20york%20city&st=cse!

!! The!maps!below!provide!further!evidence.! Residential)Segregation!by!Income!for!the!10!most!populated!U.S.!metropolitan!areas:! http://www.pewsocialtrends.org/income-segregation/new-york-city/! ! ! The!Pew)Research)Institute!developed!the!Residential)Income)Segregation)Index)(RISI)!to! measure!and!compare!urban!income!segregation!between!urban!clusters!and!analyze!trends! over!time.! ! The!RISI!is!defined!as!! (%)of)low-income)households)living)in)predominantly)low-income)Census)Tracts))+)) (%)of)high-income)households)living)in)predominantly)high-income)Census)Tracts)! ! Low!income!households!are!defined!as!having!less!than!2/3!of!the!median!annual!household! income!in!the!metro!area.!High!income!households!are!defined!as!having!more!the!double! the!median!annual!household!income!in!the!metro!area.! ! For!instance,!in!2010,!37%!of!low-income!households!in!Houston!lived!in!low-income!Census! Tracts,!while!24%!of!high-income!households!lived!in!high-income!Census!Tracts.!The! resulting!RISI!score!equals!61.!In!general,!the!higher!the!RISI!score!the!higher!the!degree!of! income!segregation.! ! The!maximum!RISI!value!is!200,!when!100%!of!low-income!residents!live!in!poor!Census! Tracts!and!100%!of!high-income!residents!live!in!wealthy!Census!Tracts.!! ! ! RISI(Scores(in(10(Most(Populated(U.S.(Metropolitan(Areas( 1980(and(2010( ! 1980 2010 change Houston 32 61 29 Dallas 39 60 21 New York 49 57 8 Los Angeles 47 51 4 Philadelphia 39 51 12 Miami 30 49 19 Washington 43 47 4 Atlanta 42 41 -1 Chicago 35 41 6 Boston 31 36 5 ! !

The!RISI!varies!significantly!among!urban!clusters!and,!except!for!Atlanta,!has!grown!in!all! U.S.!metropolitan!areas.! ! Please!read!this!short!text!to!learn!more:! http://www.pewsocialtrends.org/2012/08/01/the-rise-of-residential-segregation-byincome/! ! ! ! !

C.(Neighborhood(Choice(Models! !

(1)(Diversity(in(Demand(for(Local(Public(Goods( ! (1a)(Equal(Tax(Shares! ! ! In!general,!the!two!defining!characteristics!of!pure!public!goods!are! -!non-rivalry!in!consumption!and! -!non-excludability!from!consumption.! ! The!definition!for!“local!public!goods”!is!a!bit!weaker.!Since!it!is,!at!least!theoretically,! possible!to!exclude!out-of-towners!to!use!the!local!infrastructure,!we!only!focus!on!the!nonrivalry!condition.! ! Suppose!there!are!three!people,!L,!M!and!H,!in!a!municipality!that!have!different!preferences! regarding!the!size!of!a!public!park,!a!local!public!good!(assuming!that!it!is!not!over-crowded,! which!would!cause!rivalry).!The!curves!in!the!Figure!below!are!marginal!benefit!or!marginal! utility!curves.!They!fall!because!the!law!of!diminishing!marginal!utility,!i.e.,!the!previous!unit! is!always!worth!more!the!next!unit.!H!has!the!highest!preference!for!parks,!while!S!has!the! lowest!one.!! ! If!we!further!assume!a!constant!marginal!production!cost!of!parks!of!$60!per!acre!and!an! equal!tax!share,!each!person!had!to!pay!$20!per!acre.!Each!person!will!set!his/her!marginal! benefit!equal!to!the!marginal!cost!(i.e.,!his/her!tax!share)!to!optimize!the!desired!park! quantity.!In!this!manner,!L!will!choose!6!acres,!M!will!choose!12!acres!and!H!will!choose!24! acres!(see!Figure!8-1!below).! !

! ! ! If!this!municipality!employs!the!“majority!rule”!(i.e.,!they!do!what!most!people!want)!the! town!will!choose!a!park!size!of!12!acres.!This!is!the!median!voter’s!choice.! ! Majority!rule!decisions!always!pick!the!median!voter’s!choice.! ! The!following!example!explains!the!median!voter!outcome:! Assume!there!are!9!people!who!want!different!quantities!of!a!local!public!good!(e.g.,!a!park).! In!the!Table!below!these!people!are!sorted!from!low!to!high!preference!quantity.! ! A) B) C) D) E! F) G) H) I) Person! (median)! Desired! 0! 0! 2! 4! 5! 6! 9! 10! 100! quantity! ! Now!imagine!the!voting!process.!!Should!there!be!no!park?!A!and!B!would!vote!“yes,”!but!the! 7!other!people!would!vote!“no.”!!Okay,!there!will!be!a!park.!Should!there!be!a!park!of!2!acres?!! Three!people!would!vote!“yes”!but!6!want!a!larger!park!and!will!vote!“no”.!So,!the!park!will! be!bigger.!And!so!on!until!we!are!at!a!park!size!of!5!acres.!!Will!the!park!be!bigger!than!5! acres?!4!will!vote!“yes”!but!5!will!vote!“no.”!As!a!result,!the!park!will!be!as!big!as!the!median! voter!E!desires!it!to!be.!Note,!the!median!voter!theorem!disregards!how!strong!the!opinions! are.!For!the!outcome,!it!is!irrelevant!whether!person!I!wants!10!or!10,000!acres.! ! After!the!decision!is!made!each!person!has!to!pay!the!same!tax!share!and!most!people!(i.e.,! all!except!E)!will!be!unhappy.!! ! According!to!the!“Tiebout!model,”!many!of!them!might!choose!to!leave!the!municipality!and!

form!new!cities!with!people!you!share!their!preferences.1 !As!result,!there!would!be!cities! with!no,!small,!medium–sized!and!large!parks.!People!would!“vote!with!their!feet,”!cluster! with!their!peers!and!form!preference-driven!municipalities.! ! ! ! (1b)(Unequal(Tax(Shares! ! Now!suppose!tax!shares!are!not!even!but!differ!by!income.!That!is,!wealthy!people!pay!more! than!poor!people.!In!fact,!since!the!main!revenue!source!of!cities!is!property!taxes,!this!is! more!realistic.! ! Assume!there!are!three!people!in!a!city.!Person!A!owns!a!chicken!shack!worth!$1,000,!person! B!owns!a!house!worth!$199,000!and!person!C!owns!a!mansion!worth!$1,000,000.!Assume! the!tax!rate!is!set!as!1%!of!the!property’s!value.!That!is,!overall!tax!revenue!is!$12,000!---!just! enough!fix!the!downtown!streetlamps,!a!local!public!good.! ! ! ! ! Property!Value! Tax!Paid!in! mixed!city! ! Only!3!C-type! Only!3!B-type! Only!3!A-type!

Tax!rate!of! property!value! ! 1%!

A!

B!

C!

TOTAL!

$1,000! $10!

$199,000! $1,990!

$1,000,000! $10,000!

$1,200,000! $12,000!

! 0.4%! 2%! 400%!

! ! ! $4000!each!

! ! $4000!each! !

! $4,000!each! ! !

! $12,000! $12,000! $12,000!

! ! If!all!three!household!types!live!in!one!city,!each!person!pays!1%!of!his/her!property!value!in! taxes!resulting!in!different!absolute!tax!burdens!(see!Table!above).!Clearly,!almost!all!taxes! ($10,000/$12,000!=!83.3%)!are!paid!by!C,!the!wealthy!person.!Thus,!he!subsidizes!the!two! less!wealthy!households!and!has!little!incentive!of!staying!in!the!municipality.!! ! He!C!can!move!into!a!community!with!people!as!wealthy!as!he!is!he!can!save!a!lot!of!money.! Assume!three!C)people!now!form!a!community!and!want!to!finance!the!same!local!public! good!his!share!would!only!be!$4,000,!That!is,!his!tax!rate!would!fall!from!1%!to!0.4%.! ! Once!C!is!gone,!most!of!the!burden!will!be!on!B.!!The!town!still!needs!$12,000!but!the! property!value!is!now!only!$200,000.!Therefore,!the!tax!rate!can’t!stay!at!1%!and!will! increase!to!6%!(which!is!not!reported!in!the!Table).!There!is!a!strong!incentive!for!B!to!leave! the!city!and!form!a!municipality!with!his!peers.!(Of!course,!the!best!way!would!be!to!follow!C.! But,!as!we!will!see!later,!C!has!ways!to!avoid!that).!In!a!city!with!three!B!households,!the!tax! rate!would!be!2%;!still!much!better!than!the!6%!he!had!to!pay!if!he!had!stayed!with!A.! ! 1!If!you!want!to!learn!more!about!the!Tiebout)model!check!Ch.!15,!Local!Government.!

! Now!A!is!alone.!There!are!more!As!he!can!join!forces!with.!A!town!with!3!As!will!still!$12,000! and!had!a!joint!property!value!of!$3,000.!Each!person!had!to!pay!$4,000,!which!results!in!a! tax!rate!of!400%.! ! Overall,!unequal!tax!shares!add!one!more!layer!to!Tiebout!sorting.!Now!it!is!not!only! preferences!but!also!incomes!that!cause!people!to!choose!certain!neighborhoods.!Referring! to!the!park!example!above,!each!household!would!choose!the!optimal!of!9!neighborhoods!in! the!Table!below.! ! ! ! No!Parks! Small!Park! Large!Park! High!Income! ! ! ! Medium!Income! ! ! ! Low!Income! ! ! ! ! ! ! ! (2)(Neighborhood(Externalities( ! !Similar!to!Localization!and!Urbanization!Economies,!households!cause!positive!(and! negative)!externalities!on!their!neighbors.!Positive!neighbor!externalities!may!include!social! networking!and!learning!about!apartment!or!job!opportunities.!Negative!neighborhood! externalities!maybe!include!crime,!noise,!rude!neighbors,!bad!schools!and!environmental! hazard.! ! As!a!result,!households!compete!for!living!places!in!desirable!neighborhoods!by!bidding!for! land!and!housing.!Assume,!according!to!the!model!by!Becker!and!Murphy!(2000),2 !there!are! two!neighborhoods!(A!and!B)!and!100!households!divided!into!two!income!groups!(50!rich! and!50!poor).!There!are!positive!externalities!associated!with!living!with!rich!neighbors!and! people!are!willing!to!pay!a!premium!for!living!in!a!rich!neighborhood.!! ! In!Fog!8-2!below,!each!income!group!is!willing!to!pay!an!increasing!premium!as!the!fraction! of!rich!people!in!the!neighborhood!increases.!!For!instance!for!living!with!55%!rich! neighbors!high-income!households!are!willing!to!pay!an!$8!premium;!low-income! households!would!pay!a!premium!of!$5.!Since,!in!the!graph,!high-income!households!always! outbid!low-income!households,!there!will!only!be!a!segregation)equilibrium!(all!high-income! households!live!in!neighborhood!A;!all!low-income!households!live!in!B).!! ! ! In!contrast,!in!Fig!8-3,!low-income!households!always!outbid!high-income!households.!As!a! result,!the!fraction!of!high-income!households!cannot!grow!above!50%!resulting!in!a!stable! ! 2!Becker,!G.!and!Murphy,!K.!(2000).!Social!Economics.!Cambridge,!MA:!Harvard!University!

Press.!

integration)equilibrium!(both!neighborhoods!have!50%!rich!and!50%!poor!people).! ! ! Finally,!Fig!8-4!shows!a!mixed!outcome.!First,!high-income!households!outbid!low-income! households!until!the!rich!fraction!is!70%.!Beyond!this!point,!low-income!households!outbid! high-income!households!and!thus!not!allowing!any!high-income!fraction!above!70%.! Therefore,!a!high-income!fraction!of!70%!is!a!stable!equilibrium.!! ! ! ! !

! ! ! ! !

! ! ! !

!

!

! Quantity!over!high!rent!per!square!mile!may!allow!integration! ! The!“rent!gap”!in!the!graphs!above!are!mostly!interpreted!as!premium!per!square!meter.! However,!they!also!refer!to!total!expenditure.!!In!this!case!high-household!income!consumer! larger!lots!rather!then!paying!a!higher!rent!per!square!meter.!!The!premium!per!square! meter!can!even!be!lower!that!paid!by!low-income!households.!Table!8-3!shows!this!case.!As! a!result,!the!neighborhood!may!still!be!integrated.!High-income!consumers!occupy!larger! lots!while!low-income!occupy!smaller!niches!within!the!neighborhood.!! ! ! !

! ! ! ! Integration!through!smaller!lot!sizes!may!be!thwarted!by!zoning! ! Among!other!purposes,!zoning!laws!are!often!designed!to!stipulate!a!certain!lot!sizes!and! thus!thwart!that!low-income!household!can!join!high-income!houses.!Examples!for!this!kind! of!zoning!includes!stipulated!minimum!sizes!for!the!lot,!the!front!yard,!the!back!yard,! parking!requirements,!maximum!flat!occupancy!rates!per!apartment!or!over-night!parking! regulations!(e.g.,!Montclair,!NJ,!does!not!allow!street!overnight!parking!on!the!street!forcing! residents!to!build!parking!space!or!pay!for!a!parking!garage).!! ! ! !

(3)(Schools(and(Neighborhood(Choice( ! Assuming!an!educational!production!function!! ! Edu Achievement = f (H,P,T,S) ! ! In!the!order!of!importance,! ! a)!!the!Home!Environment!(H)!is!the!most!important!input!factor! b)!the!Peer!Group!(P),!is!the!second!most!important!input!factor!as!students!learn!more!from! and!with!smart!classmates.! c)!Teachers!(T)!influence!the!learning!experience!and!students’!motivation! d)!Class!Size!(S)!and!school!finances!has!proven!to!be!very!important!for!students’!

educational!attainment.!! ! Card!and!Krueger!(1996)!have!shown!that!increases!in!school!spending!not!only!improve! student!attainment!but!also!adult!earnings.!3 ! ! Of!the!four!most!important!inputs!at!least!three!are!closely!linked!to!the!chosen! neighborhood!(peers!are!direct,!teachers!and!school!finances/class!size!works!through! school!endowment!and!tax!revenue).! ! (4)(Crime(and(Neighborhood(Choice!! ! The!crime!rates!as!well!as!the!kind!of!crime!vary!widely!by!neighborhood.!For!instance,!this! interactive!map!provides!information!regarding!homicides!from!2003!to!2009!in!New!York! City:!http://projects.nytimes.com/crime/homicides/map! Here!are!detailed!NYC!Crime!Statistics!and!Maps:!!https://maps.nyc.gov/crime/! ! ! In!your!textbook!(p!212/213)!you!will!find!“crime!damage”!maps!where!each!crime!is! weighted!with!its!economic!damage.!For!instance,!$370!per!larceny,!$1,500!per!burglary,! $4,000!per!car!theft,!$13,000!per!armed!robbery,!$15,000!per!assault,!$70,000!per!rape!and! $2.4!million!per!homicide.! ! Neighborhood!choice!is!thus!determined!by!weighing!the!expected!crime!damage!and!the! rent!discount.!Or!in!other!words,!there!will!be!premium!for!safer!neighborhoods.!This! premium!will!enforce!sorting!by!income,!i.e.,!high-income!households!tend!to!live!in!safer! neighborhoods.! ! ! ! (5)(Racial(Segregation! ! Many!cities!in!the!U.S.!exhibit!pronounced!racial!segregation.!Some!neighborhoods!are! almost!entirely!black,!while!others!are!entirely!white.!(see!Map!8-6!and!8-7!in!your! textbook).! ! Causes! ! There!are!three!possible!reasons!for!racial!segregation:! ! a)!Preference!choices!and!premiums!according!to!the!Becker!&!Murphy!(2000)!model!(Fig!85!in!your!textbook).!Both!races!are!willing!to!pay!a!premium!to!live!in!neighborhoods! dominated!by!whites.!However,!first,!whites!are!willing!to!pay!more!and!outbid!blacks.! Second,!blacks!are!willing!to!pay!an!increasing!premium!only!to!a!white!a!share!of!about! ! 3!Card,!D.!and!Krueger,!A.!(1996).!Labor!market!effects!of!school!quality:!theory!and! evidence.!In!Burtless,!G.!“Does!Money!Matter?!Washington”!DC:!Brookings.!

64%.!! ! b)!Assuming!that!black!households!tend!to!be!less!well-off!than!white!ones!zoning,!as!a! means!of!income!segregation,!also!enforces!racial!segregation.!! ! c)!According!to!Yinger!(1998),4 !there!seem!to!be!some!evidence!of!“racial!steering”!by!real! estate!agents.!Blacks!are!show!fewer!apartments,!steering!into!certain!neighborhoods,!and! get!less!well!informed!regarding!financial!options.!! ! ! Consequences( ! (a)!Spatial!Mismatch! There!is!a!tendency!of!white!households!and!formerly!CBD!jobs!moving!into!suburban!areas,! while!black!households!remain!in!the!urban!center.!!As!a!result,!blacks!live!further!away! from!their!jobs!and!have!higher!commuting!costs.!This!is!called!Spatial)Mismatch.! ! Figure!8-6!in!your!textbook!shows!employment!numbers!in!pronouncedly!black! neighborhoods!in!the!San!Francisco!Bay!Area!have!grown!substantially!slower!than!in!white! neighborhoods.!!This!is!especially!true!for!manufacturing!jobs.! ! For!the!Philadelphia!area,!Ihlanfledt!and!Sjoquist!(1990)5 !found!that!the!Spatial!Mismatch!is! responsible!for!! -!25%!of!the!employment!rate!gap!between!whites!and!blacks!! -!31%!of!the!employment!rate!gap!between!whites!and!Hispanics! In!addition,!the!spatial!mismatch!is!more!relevant!in!larger!metropolitan!areas!(than!in! smaller!cities).! ! ! (b)!Schools!and!Education,!Crime,!Social!Distress! ! As!mentioned!above,!black!neighborhoods!tend!to!be!poorer!than!white!neighborhoods.!This! lowers!tax!revenue!and!school!spending!and!thus!affects!directly!the!educational!production! function!(see!above).! ! As!a!result:!! -!High!school!drop-out!rates!are!substantially!(about!100%)!higher!in!black!inner-city! neighborhoods!than!in!white!suburbs.! -!Even!completed!degrees!differ!in!quality.!Scores!on!standardized!tests!are!significantly! lower!in!black!inner-city!school!districts!than!in!white!suburban!districts.!! Schiller!(1995)!suggests!that!the!education!received!from!a!black!central-city!high!school!is! ! 4!Yinger,!J.!(1998).!Evidence!on!discrimination!in!consumer!markets.!Journal)of)Economic)

Perspectives,!12(2),!23-40.! 5!Ihlanfledt,!K.R.!and!Sjoquist,!D.L.!(1990).!Job!accessibility!and!racial!differences!in!youth! employment!rates.!American)Economic)Review,!80(1),!267-276.!

the!rough!equivalent!of!the!education!received!from!a!white!suburban!dropout.!!

! ! Results( à!Segregation!lowers!the!educational!attainment!and!future!income.! It!thus!has!a!self-enforcing!tendency.! !...