USER CHARGES AND THE DEVELOPMENT OF URBAN LAND

Abstract

The goal of this paper is to investigate the effects of three alternative pricing schemes for financing local government activities on the development of urban land: marginal cost pricing, average cost pricing, and the property tax. The scanty evidence that exists on the relationship between density and the cost of providing various public services is reviewed. Next, the three pricing schemes are applied to sewer service in a hypothetical city noting differences in their impact. The capitalization of the impact into land values is then explored and the effects on development are discussed. The paper concludes that an average cost price undercharges outlying low density developments. It is shown that the property tax may more accurately reflect marginal costs than the average cost price. Finally, it is shown that Vickrey's argument that any errors due to average cost pricing will be capitalized into the land and returned to the government fisc is only partially true.