DP8120 The Henry George Theorem in a second-best world

Author(s): Kristian Behrens, Yoshitsugu Kanemoto, Yasusada Murata
Publication Date: November 2010
Keyword(s): Henry George Theorem, local public goods, monopolistic competition, optimal city size, second-best economies
JEL(s): D43, R12, R13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8120

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.