Transport costs, capital mobility and the provision of local public goods

Using a new economic geography model with local governments, this study analyzes the relation between transport costs, capital mobility and the provision of local public goods that improve regional productivity. First, if capital is immobile, the effect of local public goods on regional competitiveness engenders over-provision of local public goods, whereas the interregional spillover engenders under-provision of local public goods. As transport costs fall, the latter effect becomes stronger than the former; consequently, the provision status of local public goods changes from under-provision to over-provision. Secondly, if capital is mobile, capital flows to regions with a larger market (higher productivity) when transport costs are high (low). Such capital mobility changes the local public policy from under-provision to over-provision as transport costs fall.