The provision of local public goods and factors in the presence of firm and household mobility

This paper studies the efficiency properties of allocations when firms and households are mobile and when local governments provide local public goods and local public factors. The analysis differentiates between immobile land owners and perfectly mobile workers and concludes that an efficient allocation is obtained if there is no outflow of land rents to absentee owners. If rents flow out, only local public goods are supplied in accordance with the Samuelson Rule. The provision of local public factors is inefficiently low, however, and jurisdictions tax mobile firms and mobile households inefficiently high in order to restrict the outflow of rents. An optimal intervention scheme is derived in this case. We also analyze the distortions that result when the non-availability of local head taxes makes it impossible to internalize crowding costs.