Working Paper: NBER ID: w1004
Authors: Roger H. Gordon
Abstract: In a Federal system of government, each unit of government decides independently how much of each type of public good to provide, and what types of taxes, and which tax rates, to use in funding the public goods. In this paper we explore what types of problems can arise from this decentralized form of decision-making. In particular, we describe systematically the types of externalities that one unit of government can create for nonresidents, through both its public goods decisions and its taxation decisions. The paper also explores briefly what the central government might do to lessen the costs of decentralized decision-making.
Keywords: Fiscal Federalism; Optimal Taxation; Public Goods; Externalities
JEL Codes: H77; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decentralized decision-making (D70) | inefficiencies (D61) |
| Local governments ignoring utility of nonresidents (H79) | inefficiencies (D61) |
| Local governments' decisions about public goods and taxation (H73) | externalities affecting nonresidents (D62) |
| Excessive taxation of certain activities (H29) | negative impacts on neighboring communities (F69) |
| Coordinated government behavior (E61) | efficient allocation of resources (D61) |
| Federal intervention (H77) | mitigate inefficiencies from decentralized decision-making (D61) |