Local public goods and their capital-gain effects

Abstract

An attempt is made to analyze the capital-gain effect of local public goods and to investigate the conditions under which the efficient provision of local public goods and optimal population size are realized. This requires a two-period model where an owner-resident takes into consideration the effects of public good provision on both the utility from their consumption and the land value. In this study, the Brueckner-Joo model [Brueckner, J.K., Joo, M.-S., 1991. Voting with capitalization. Regional Science and Urban Economics 21, 453–469] is improved so that internal consistency is met, and optimal population size is determined as well. As for the allocative efficiency test of public goods provision, a hypothesis different from that of Brueckner–Wildasin is derived. Where public goods are provided by current residents on the basis of their capital-gains motivation, the sign of the coefficients of public good variables in the land price regression gives different signals to different groups of residents, concerning the efficiency of public goods provision. It is also shown that the optimal population size in a city is necessarily larger than the efficient size which minimizes the per capita provision cost of public goods. This suggests that, under the capital-gain hypothesis, the coefficient of population size must be significantly negative in the land price regression.