OPTIMAL TAXATION IN A SPATIAL ECONOMY WITH TRANSPORT COSTS

Drawing on both optimal tax theory and residential location theory, this paper investigates optimal first- and second-best taxation in a spatial urban economy with transport costs. The introduction of space and transport costs into optimal tax theory creates a number of complications. Most importantly, spatial efficiency, as well as the more familiar forms of efficiency, needs to be considered in determining the optimal set of taxes. The results are of particular interest in the context of local public finance. The paper provides a method for determining the shadow rent on land in the presence of distortionary taxation, and also a framework for analyzing other distortions in a spatial economy. © 1979.