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.