Empirical Public Economics
Edited by Attiat F. Ott and Richard J. Cebula
Chapter 9: Strategic Interaction Among Local Governments: A Spatial Analysis of Spillover of Public Goods
Soma Ghosh 1 Introduction An analysis of spillover of public goods is usually associated with a federal– ﬁscal system, where responsibility of provision of public services is allocated across multi-level units of the government. One of the unique characteristics of a public good that distinguishes it from a private good is that it gives rise to externality or spillover. Spillover occurs when a service provided by one community beneﬁts (or harms) residents of other communities. Examples of spillovers are many; an increase in pollution abatement of one state improves the environmental quality of neighboring states; an increase in crime in one state may harm residents of neighboring states and so on. In the US federal system, local governments do not receive massive ﬁnancial aid from higher levels of government. Rather, they rely on own sources of revenue to ﬁnance their services. Few tax bases are available to local governments. Thus, to expand their bases incentive packages such as tax breaks, low interest loans, grants and other ﬁnancial incentives are offered by many counties (as well as cities) as they compete for residents and businesses. As pointed out by Tiebout (1956), ﬁscally induced migration among jurisdictions is motivated by the entire ﬁscal package, that is, by the level of public services relative to the tax burden. Local jurisdictions might have an incentive not only to keep their tax burdens low but also to provide ‘similar’ levels of public services to keep their community in line with others. Interdependence among local...
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