Question

"Some have argued that diversity in communities and schools leads to positive externalities. What implications does this view have for the efficiency of a Tiebout equilibrium? What implications does it have for government policy?"

Answer 1

If positive externalities have resulted from the diversity in communities and schools, then there will be an inefficient sorting into homogenous communities implied by the Tiebout model.

While deciding the location to locate, the positive externalities which can be facilitated by living in the communities where they can improve diversity may not be considered by the families and this will lead to a situation where they will favor to locate themselves in the community having relatively higher homogeneity. If this view is considered to be true, there can be the possibility of welfare improving government diversity- improving interventions. Offering subsidies for building low-income housing in wealthy communities can be seen as one of the example fo these interventions.