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The Henry George Theorem in a second-best world

  • Behrens, Kristian
  • Kanemoto, Yoshitsugu
  • Murata, Yasusada

The Henry George Theorem (HGT), or the golden rule of local public finance, states that, in first-best economies, the fiscal surplus, defined as aggregate land rents minus aggregate losses from increasing returns to scale activities, is zero at optimal city sizes. We derive a general second-best HGT in which the fiscal surplus equals the excess burden, expressed as an extended Harberger formula. We then apply our theorem to various settings encompassing urban economics, the new economic geography and local public finance to investigate whether or not a single tax on land rents can raise enough revenue to cover aggregate losses from increasing returns to scale activities.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8120.

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Date of creation: Nov 2010
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Handle: RePEc:cpr:ceprdp:8120
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