Working Paper: CEPR ID: DP8120
Authors: Kristian Behrens; Yoshitsugu Kanemoto; Yasusada Murata
Abstract: The Henry George Theorem (HGT), or the golden rule of local public finance, states that, in first-best economies, the fiscal surplus, defined as aggregate land rents minus aggregate losses from increasing returns to scale activities, is zero at optimal city sizes. We derive a general second-best HGT in which the fiscal surplus equals the excess burden, expressed as an extended Harberger formula. We then apply our theorem to various settings encompassing urban economics, the new economic geography and local public finance to investigate whether or not a single tax on land rents can raise enough revenue to cover aggregate losses from increasing returns to scale activities.
Keywords: Henry George Theorem; Local Public Goods; Monopolistic Competition; Optimal City Size; Second-Best Economies
JEL Codes: D43; R12; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal city size (R12) | fiscal surplus (H62) |
| city size increases (R12) | fiscal surplus equals excess burden (H62) |
| urban density (R11) | public finance outcomes (H59) |
| excess burden (H22) | induced changes in consumption (D12) |
| excess burden (H22) | induced changes in product diversity (L15) |
| fiscal surplus = excess burden (H62) | HGT holds (F12) |