SUPPLY AND DEMAND FOR SUBNATIONAL PUBLIC GOODS: A THEORETICAL AND EMPIRICAL ANALYSIS

JAMES ROBERT NUNNS, Purdue University

Abstract

This study analyses the supply and demand for subnational public goods using an extended median voter model. In median voter models, budgets are determined by majority voting on pairs of alternatives. Voters' preference functions include public goods, and tax payments enter their budget constraints. These tax payments can be expressed as the product of voters' "tax prices" (their share of the community's tax base) and the quantity of public good provided in the community. Given tax prices, private good prices, and income, each voter will have a preferred level of public good output. There can be only one level provided, however, and this will be the level preferred by the voter with the median demand. Production is assumed to be by constant returns, Cobb-Douglas technologies controlled by cost minimizing bureaucracies. Supply curves can be specified, but not econometrically estimated because neither price nor quantity of public goods is observed. Further, little is known about the depreciation rate or the stock of capital used in the production of public goods. To overcome these difficulties, the Cobb-Douglas assumption is used to derive an estimating equation for the depreciation rate and initial stock of capital. Using these results and data on investment, capital goods' prices, and other factor inputs and their prices, through several steps an output series is obtained. Dividing expenditures by outputs gives prices. These "supply" price and quantity results are then used in the estimation of the demand equations. The regressions use FY 1957-78 data for the New Mexico State and local governments. The supply-related regressions show that the depreciation rate on New Mexico governments' capital is fairly low. The demand regressions show that public goods demand in New Mexico is generally price inelastic and income elastic, that the goods exhibit little rivalness, and that these governments spend a much higher fraction of income that accrues directly to them than they spend out of income accruing to households.

Degree

Ph.D.

Subject Area

Finance

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