Optimal Departures from Marginal Cost Prices for Local Public Services

For approximately the past forty years, it has been fashionable among those studying public commodities to scorn the Balkanization of their production and distribution. Economists have been noteworthy in this regard. They have based their advocacy for the control and provision of public services upon the notion that economies of i scale in production require centralization. In addition to their arguments for metropolitanism, they have presented standard economic arguments for setting the prices of a public services at their marginal costs. The dominant normative view has been straightforward: centralize the provision of public goods and equate their prices to marginal costs. These prescriptions lead to prices that are higher as one moves further from a system's load centre into less densely settled areas. The implications for urban spatial structure are clear: prices in central cities that are densely settled and close to load centres will be lower than those for the suburbs. Hence, the central provision of goods and services, priced at marginal cost, will tend to encourage dense development close to a system's load centre