Optimal Fiscal Zoning That Distorts Housing Consumption

When entrants to Tiebout-type communities face limited alternatives,local governments possess some monopoly power over the use of land within their boundaries. One way they exercise that power is through fiscal zoning which attempts to extract tax revenues from newcomers in excess of the cost of the local services they consume. Ideally, the community would like to do this by regulating the newcomers' tax bases, but in practice this is impossible. Thus, indirect methods such as minimum lot size zoning are necesary. Since it is not possible to control all inputs into the production of housing, however, zoning is distortionary. This article examines the impact of the distortions of minimum lot size zoning on the ability of local governments to implement fiscal zoning.