Chapter 8 Neighborhood Choice

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Chapter 8 Neighborhood Choice
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Income
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The Demand for Public Goods
Assumptions 3-person city (Marian, Lois, Hiram)
with 3 different demands for park space,
referendum votes with paired choices for sizes
(6, 12, 28 acres). Tax(1/n)C, where n is pop,
C is cost of park. Majority rule ensures 2 will a
lways be unhappy Incentive is to find like-prefer
enced people to form a new city with exactly the
RIGHT park size 3 different cities develop
_at_ 20/acre, there are 3 different quantities dem
anded
Median wins!!!
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The Demand for Public Goods

• So, with different demands for the public good,
  we get more cities. As long as we use a head tax
  (everyone pays the same amount) this will be
  stable3 cities, 3 different sized parks.
• Up until now, we assumed everyone pays (1/n)C of
  the cost.
  
• Suppose we have a tax on property to pay for the
  parks.
  
• Since prop. values can differ, tax bills will
  differ
  
• Utility from the use does not
• Some pay less, some pay more in the same city
• More cities develop based on property (housing)
  values
  
• Johns Creek vs Atlanta
• Sandy Springs vs Atlanta

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Housing Values
Johns Creek
Sandy Springs
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Peer effects and Externalities

• Children living and going to school in areas
  where adults provide good role models benefit,
  but the adults dont get paid for being role
  models.
• Children learn better around other children who
  are good students, but the good students dont
  get paid for the positive benefits they emit.
  
• Adults also receive external benefits from being
  around other high-income, educated, employed
  adultsinfo about job prospects, etc.
  
• So, there is competition for housing in
  high-income neighborhoods.

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Rent Premium for High-inc neighborhoods
At point i, there are equal numbers of low and
high-income households. The rent premium is 0.
The positive slope comes from the positive
external benefits from living in a neighborhood
of higher-incomes. Suppose 5 hi-inc HH move to A,
and 5 Lo-inc HH move to Bthis starts a chain
reaction of movement However, the higher income
HH are able to pay MORE to live in neighborhood
A. The result is both an ever-increasing premium
to live in A and income segregation.
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Rent Premium for High-inc neighborhoods
The previous slide is only ONE possible
scenario. There might be a situation where lo-inc
HH are willing to pay MORE to be in hi-inc
neighborhoodsi.e., they derive larger marginal
external benefits than do the hi-inc HH from
being located near hi-inc HHs.
Education, public services Employment
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Rent Premium for High-inc neighborhoods
We could also end up with economically mixed
neighborhoods away from equal s of hi and lo in
each If there was there was initially a high pre
mium for hi-inc But, then the benefits to hi-inc
begins to rise more slowly. Neighborhood A is 70
hi-inc, 30 lo-inc
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Relaxing the Assumption of Equal Lot Size
Land is a normal good. Until now, the premium
paid for locating in a hi-inc neighborhood was
based on identical housing and lot size.
Higher income family will consume more land,
but By doing so, their premium per unit of land
declines!!! Think of it this wayif you are a lan
d owner and youre trying to maximize rental
income per unit of land, who provides you with
higher income, a high income family, or a low
income family? In this case, the low income famil
y, because they pay 5 per lot.
Because, per unit of land, low-income families
together can outbid high-income families, we get
income integration. Large differences in land con
sumption relative to the premium results in more
integration.
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Short-Circuiting the Process with Large-Lot
Zoning

• Why would a local government set a minimum lot
  size?
  
• Tax collections on smaller units often fall short
  of service costs.
  
• In Carroll County, about 250,000-300,000 is the
  break-even household of 2 kids and 2 adults.
  
• Local ordinances setting minimum lot size reduces
  income integration.
  
• It also can increase costs of service provision
  how might this happen? (NOT IN BOOK)

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Capitalization of Local Public Services

• Because land IS immobile and housing is somewhat
  immobile, differences in quality of local public
  goods/services can result in value differences in
  land and houses.
• Example Good schools increase housing prices
• The education production function
• Achievementf(H, P, T, S) where
• Hhome environment, Pquality of peers,
  Tteacher quality, SClass size

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Education and Neighborhood Choice

• Parents choose their residential location based
  on the quality of a bundle of local
  serviceseducation is an important one.
  
• Signals of Quality
• Peer group (current test scores)
• Measures of local income (potential tax base)
• Class size (school resources)
• If High-income households are willing to pay a
  premium to locate in good school districts, we
  have yet another reason for income segregation.

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Where do you think housing prices are the highest?
Near the schools with good students and/or
teachers
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Where do you think housing prices are the highest?
Near the schools with parents who are well
educated
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Crime is Just the Absence of a Public Good

• Crime is also capitalized into housing prices.
• Households are willing to pay a premium to live
  in low-crime neighborhoods.
  
• Based on our discussion so far, who is likely to
  live in neighborhoods with more crime,
  high-income or low-income households?
  
• Estimated elasticity of property value with
  respect to crime rates -0.067 means lowering the
  crime rate by 10 increases the value of a
  200,000 house by 1,340.

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Atlanta violent crimes, like Clevelands
property crimes are concentratedlots of crime
occurs in a few tracts. Atlantas violent crime
is concentrated in the central and south-central
tracts.
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Racial Segregation

• Current location of Black and White population.
• 2/3rds of Blacks live in central city, 1/3rd of
  Whites.
  
• 1/3rd of Blacks live in suburbs, 2/3rds of
  Whites.
  
• Using the Index of Dissimilarity, we have seen
  segregation decrease between 1980 and 2000 in 203
  of 220 metro areasaverage decrease was 12.

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Survey Info

• The majority of Blacks prefer to live in
  integrated neighborhoods
  
• The majority of Whites prefer to live in
  segregated (White) neighborhoods.
  
• The average Black respondent interpreted
  integrated as meaning 50 White, 50 Black.
  
• The Whites who say they prefer integrated
  neighborhoods interpreted integrated as
  proportionate to the population overall.

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Describing Race-Based Segregation
If we start at point I, 50/50 integrated.
The two curves represent two different
preferences. One White HH moves toward Whites. Th
e White HH must outbid Blacks for housing near
other Whites. If Whites prefer whiter neighborh
oods and Blacks prefer integrated at maximum 64
white. Beyond that, and the premium Blacks are
willing to pay starts to fall.
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Results of SegregationSpatial Mismatch
Segregation affects employment opportunity.
Whites have moved to the suburbs.
Manufacturing has moved there also, but for
different reasonsland prices.
The result Job access is lower for Blacks, and
now other minorities than for suburban whites.
Information transportation
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Segregation and Poverty Trap

• Segregated households are placed at an economic
  disadvantage.
  
• Poorer education
• Increased dropout rate
• Lower income
• Higher rate of unemployment

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