Spatial equilibrium with local public goods: Urban land rent, optimal city size and the Tiebout hypothesis

Abstract

This paper extends the standard model of urban land rent to consider the spatial equilibrium conditions in a local public goods market as hypothesized by Charles M. Tiebout. An analysis is made of the spatial dimensions of public goods, their degree of ‘localness’ and their impact on land values. It is shown that the optimal population size of the community (Tiebout's sixth assumption) is simultaneously derived with the optimal supply of local public goods and local taxes. It is also shown that land rent is a poor output indicator of Tiebout's equilibrium conditions and that the capitalization assumption is not the appropriate test for his hypothesis.