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City Size and the Henry George Theorem under Monopolistic Competition

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Author Info
Kristian Behrens
Yasusada Murata

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Abstract

We analyze the equilibrium and the optimal resource allocations in a monocentric city under monopolistic competition. Unlike the constant elasticity of substitution (CES) case, where the equilibrium markups are independent of city size, we present a variable elasticity of substitution (VES) case where the equilibrium markups fall with city size. We then show that, due to excess entry triggered by such pro-competitive effects, the "golden rule" of local public finance, i.e., the Henry George Theorem (HGT), does not hold at the second best. We finally prove, within a more general framework, that the HGT holds at the second best under monopolistic competition if and only if the second-best allocation is first-best efficient, which reduces to the CES case.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0834.

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Date of creation: 2008
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Handle: RePEc:lvl:lacicr:0834

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Related research
Keywords: City size; Henry George Theorem; monopolistic competition; first-best and second-best allocations; variable elasticity;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
R12 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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