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Why Cities Should not be Subsidized

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  • Robert Fenge
  • Volker Meier

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Abstract

The paper deals with the question of whether fiscal transfers re-ceived by cities can be justified by a higher cost of producing publicly provided goods. In the model, increasing the population density implies both a higher output per capita due to agglomeration economies and a higher cost of the publicly provided good due to congestion. It is shown that introducing fiscal transfers to be paid by the region with the lower population density will generally reduce welfare. This result is obtained since the city is already beyond the level of optimum agglomeration.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-08/cesifo_wp546.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 546.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_546

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Keywords: interjurisdictional transfers; congestion; publicly provided goods;

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References

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  1. Papageorgiou, Yorgos Y. & Pines, David, 2000. "Externalities, Indivisibility, Nonreplicability, and Agglomeration," Journal of Urban Economics, Elsevier, vol. 48(3), pages 509-535, November.
  2. Edward L. Glaeser & David C. Mare, 1994. "Cities and Skills," NBER Working Papers 4728, National Bureau of Economic Research, Inc.
  3. Anwar Shah, 1996. "A Fiscal Need Approach to Equalization," Canadian Public Policy, University of Toronto Press, vol. 22(2), pages 99-115, June.
  4. Fujita,Masahisa & Thisse,Jacques-François, 2013. "Economics of Agglomeration," Cambridge Books, Cambridge University Press, number 9781107001411, 9.
  5. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  6. Petchey, Jeffrey, 1995. "Resource Rents, Cost Differences and Fiscal Equalization," The Economic Record, The Economic Society of Australia, vol. 71(215), pages 343-53, December.
  7. Christian Baretti & Bernd Huber & Karl Lichtblau & Rüdiger Parsche, 2001. "Die Einwohnergewichtung auf Länderebene im Länderfinanzausgleich : [Gutachten im Auftrag der Länder Baden-Württemberg, Bayern, Hessen und Nordrhein-Westfalen] ; mit einem ergänzenden Gutachten des Zen," ifo Beiträge zur Wirtschaftsforschung, Ifo Institute for Economic Research at the University of Munich, number 4, July.
  8. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 483-99, June.
  9. Oates, Wallace E., 1988. "On the measurement of congestion in the provision of local public goods," Journal of Urban Economics, Elsevier, vol. 24(1), pages 85-94, July.
  10. Myers, Gordon M., 1990. "Optimality, free mobility, and the regional authority in a federation," Journal of Public Economics, Elsevier, vol. 43(1), pages 107-121, October.
  11. Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
  12. Robert P. Inman & Daniel L. Rubinfeld, 1997. "Rethinking Federalism," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 43-64, Fall.
  13. Duncan Black & Vernon Henderson, 1997. "Urban Growth," NBER Working Papers 6008, National Bureau of Economic Research, Inc.
  14. Hochman, Oded, 1981. "Land rents, optimal taxation and local fiscal independence in an economy with local public goods," Journal of Public Economics, Elsevier, vol. 15(1), pages 59-85, February.
  15. Richter, Wolfram F. & Wellisch, Dietmar, 1996. "The provision of local public goods and factors in the presence of firm and household mobility," Journal of Public Economics, Elsevier, vol. 60(1), pages 73-93, April.
  16. Craig, Steven G., 1987. "The impact of congestion on local public good production," Journal of Public Economics, Elsevier, vol. 32(3), pages 331-353, April.
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Citations

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Cited by:
  1. Albert Solé-Ollé & Elisabet Viladecans-Marsal, . "Cities as engines of regional growth," Studies on the Spanish Economy 145, FEDEA.
  2. Albert Solé Ollé & Elisabet Viladecans Marsal, 2003. "Fiscal and growth spillovers in large urban areas," Working Papers 2003/1, Institut d'Economia de Barcelona (IEB).
  3. Eichhorst, Anja, 2007. "Evaluating the need assessment in fiscal equalization schemes at the local government level," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(5), pages 745-770, October.
  4. David Albouy, 2009. "What Are Cities Worth? Land Rents, Local Productivity, and the Capitalization of Amenity Values," NBER Working Papers 14981, National Bureau of Economic Research, Inc.
  5. Thiess Buettner & Fédéric Holm-Hadulla, 2008. "Cities in Fiscal Equalization," CESifo Working Paper Series 2447, CESifo Group Munich.
  6. Buettner, Thiess & Holm-Hadulla, Fédéric, 2013. "City size and the demand for local public goods," Regional Science and Urban Economics, Elsevier, vol. 43(1), pages 16-21.

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