The Supply of Local Public Goods

Local Public Goods

A public good with a benefit that is limited to a specific region is called a local public good, or a club good, as explained in Chap. 11. This type of good has the following properties. (1) Although it is not excludable within a region, the benefit does not spill over to other regions. (2) Although it is not a rival with respect to consumption, it may be excludable in a region.

With regard to (1), excludability works only beyond the region. The degree of spillover is not necessarily equal to the administrative range of local governments. In this regard, strictly speaking, the decentralized system results in inefficient allocation unless spillover effects are appropriately internalized. However, the degree of inefficiency is less than in the centralized system. If the spillover effect is large, central government must intervene to internalize this.

With regard to (2), local governments can restrict the range of the benefit. If the range of the benefit is limited within a region, the local government can attain optimal efficiency of allocation. In this sense, most local public goods may be regarded as club goods.

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