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The provision of infrastructure: benefit–cost criteria for optimizing local governments

  • T. Daniel WoodburyEmail author
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Abstract

This paper models the provision of a local public good that is simultaneously utilized as a public consumption good and a public intermediate good. Since the public good enters both utility and production functions, it is considered a “generalized public good.” This is done to model the provision of infrastructure by sub-federal governments, which is financed with taxes on local residents. Households are mobile in the model, and the theoretical analysis provides a benefit–cost rule for public good provision by a rent-maximizing local government. Illustrative calculations of the marginal cost of public funds are provided, and they show a wide range of values matching previous estimates of the marginal productivity of infrastructure. The impact of intergovernmental transfers on the provision of infrastructure by rent-maximizing local governments is presented.

Keywords

Public goods Public inputs Infrastructure Cost–benefit analysis Fiscal federalism 

JEL Classification

H40 H70 R50 

Notes

Acknowledgements

This paper draws from Chapter II of my dissertation. I wish to thank Dr. David Wildasin for many helpful discussions and the other members of my thesis committee for their comments. I am also grateful to the editor and anonymous referees for their helpful comments. I am solely responsible for any errors.

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© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Young Harris CollegeYoung HarrisUSA

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