Public Goods as a Screening Mechanism

Court decisions in the past twenty years such as Southern Burlington County NAACP v. Mount Laurel Associated, as well recent legislation, have made exclusionary zoning laws based on race illegal and have limited, at least in many states, the legality of exclusionary zoning based on income. While there may be a number of reasons for the use of exclusionary or fiscal zoning, an economic rationale suggested by Hamilton (1975) is that fiscal zoning, in the form of minimum housing standards, can reduce or eliminate the divergence between tax payments and the cost of providing public services that arise from financing local public services through property taxes. In the absence of fiscal zoning an inefficient and possibly undefined equilibrium mix of residents among localities may exist. Fiscal zoning, by effectively requiring a minimum value of any house in the community, will lead to a minimum property tax payment for every household, thereby eliminating the possibility that the cost of public services received families with lower housing consumption and presumably income exceed the tax payments to them. Here we demonstrate that in the absence of zoning, higher income households, to ensure that low income households do not enter their community, can either increase their public services or subsidize goods consumed by higher income households but not lower income households. These strategies will make the rich community less attractive to the poor leading them to leave the community, thereby reducing the subsidy paid by the rich and increasing their utility.