Private good provided by local governments

Abstract

This paper investigates the outcome of decentralized decision making by local governments in provision of private good, and examines its efficiency. In the setting of a two-region economy, each local government decides whether to provide the service, then chooses user fees and taxes, so as to maximize the utility of its residents. At equilibrium, the local government imposes discriminatory fees for service users from other region. There exists four patterns of provision as Nash equilibrium, including the case of multiple equilibria, and conditions for each emerging are derived. We formulate and solve the optimizing problem to obtain Pareto-efficient allocation with respect to patterns of provision, user fees and taxes. Comparing equilibrium and optimal solutions, it turns out that competition among governments may lead to either over-provision or under-provision, depending on the degree of scale economies and population distribution.