A series of recent judicial decisions has focused public attention on the issue of local choice in the provision of public education. In Serrano vs. Priest, Rodriguez vs. San Antonio (1971), and similar cases in other states, the lower courts confirmed that education is a responsibility of the state government and held that local expenditures on education may not be a function of the taxable wealth of the local community.1 Although the United States Supreme Court has overturned these decisions in the appeal of Rodriguez vs. San Antonio (1973), the pressure to change the current system remains strong. The Supreme Court majority indicated that its decision reflected the limits of the federal constitutional authority and was not an approval of the status quo in educational finance. Litigation is now likely to shift to challenging the current methods as unconstitutional under state constitutions which, unlike the federal constitution, do deal specifically with education.2 Moreover, fundamental changes in the financing of local education may not require further pressure from the courts; state legislatures may seek to neutralize the effects of local wealth differences even if the current systems are not held to be unconstitutional. These judicial decisions and the ensuing legislative proposals run counter to the general economic view of local government finance. The basic presumption of economic analysis is that, because local governments can select different levels of service and because individuals can choose their area of residence, decentralized finance by local governments allows the provision of public services to reflect the variety of individual preferences for public services.3 Although the level of local spending may be nonoptimal because of intercommunity externalities and because of the method of local budget determination, fiscal decentralization still remains the only alternative to the insuperable problem of determining the optimal level of expenditure on a public service provided by a central government. In effect, autonomous decentralized financing of education provides a quasi market in which households can exercise their diverse preferences by their location decisions. This paper considers the problem of * Professor of economics, Harvard University. I am grateful to Charles Clotfelter for assistance with the statistical analysis, to Stephen Weiss for providing unpublished data on school expenditures, and to the Ford Foundation and National Science Foundation for financial support. I have benefited from discussions of an earlier version in seminars at Harvard, M.I.T., and Berkeley, and from comments by Noel Edelson, Eric Toder, and David Stern. An earlier and more complete discussion of this study was distributed as Harvard Institute of Economic Research paper no. 293, May 1973 (revised July 1973). 1 In Serrano vs. Priest, the landmark case in this area, the plaintiff and the courts were very much influenced by the line of argument and suggested remedies develope(l in John Coons et al. For a further discussion of the legal precedents, see Arthur Wise. 2 Almost immediately after the United States Supreme Court decision in Rodriguez vs. San Antonio, the New Jersey Supreme Court held that the current system of local finance violated the New Jersey state constitution. See Wise for a summary of the provisions of other state constitutions. I Charles Tiebout presented a formal analysis of the full efficiency of local government provision of public services under quite special conditions. See Wallace Oates and James Buchanan and Charles Goetz for a further discussion of these issues.