Efficiency in the Supply of Regional Public Goods that are Subject to Congestion

The purpose of the current paper is to extend the theory of regional public goods to account for population congestion,or crowding, and then to introduce the possibility of congestion into boundary spillovers of benefits. This paper deals with congestion costs for regional public goods provided by provinces which belong to a federation and indicates how optimizing subsidies may be used by the federal government to correct for benefit spillovers. The analysis is based on the assumption that for each province there is a social welfare function and that this welfare function is defined in terms of per capita consumption of private and public goods. The next section of the paper develops the theory of congested public goods and shows how congestion will affect the behaviour of a single province, which is exclusively concerned with the welfare of its residents. Section III introduces congestion into local public good benefits and into spilling benefits. Provincial and federal optimization conditions are also derived. Section IV concludes the paper.