Cities, Scale Economies, Local Goods and Local Governments

Abstract

This study utilises a precise diagrammatic exposition to analyse issues involving the existence and stability of cities, land rents, and private and public local finance. In spite of the limitations of the exposition (such as having only two dimensions) the model is very general, primarily due to the use of cost curves in the analysis. The main new results of this study are: (1) A generalisation of the Henry George law. In its extended form, this law expresses the sufficiency of land rents for the financing of efficient local government investments in local public goods (pure or not), Piguvian subsidies and taxes, and in the internalisation of external economies of scale (except for the case of natural monopoly cities). For this study, a further extension has been made to apply to an economy with many different population groups, industries, cities, and production factors. (2) That when the basic industry of a city has scale economies internal to the individual firm, the optimal local government policy is the subsidisation of a single firm in the industry and deterrence from entry of all other firms of the same industry. In this case and, unlike that of the natural monopoly city, there may exist many such cities. (3) The identification and characterisation of internal and external scale economies in real life, and the type of city evolving from each and actual actions and procedures used by local governments which can be (and often are) used to increase efficiency. (4) The study of a natural monopoly city and the actions to be taken by both federal and local governments that are needed to achieve efficiency. (5) The existence of a criterion for the (Pareto) desirability of marginal local government investments. The criterion is based on changes in net land values. (6) The possible existence of local optimum solutions to the problem of an efficient city, which indicate the possible efficiency of major changes in the use of land in an already existing city. When the investment in such a major project is broken into stages, the initial steps in the series of investments may appear to be inefficient according to the above criterion (5), although the investment as a whole is altogether desirable.