CAN REGIONALIZATION OF LOCAL PUBLIC-SERVICES INCREASE A REGIONS WEALTH

In the presence of agglomeration and congestion externalities the sequ ence of location choices made by firms results in an inefficient distr ibution of economic activity, since individual firms do not bear the c ongestion costs they impose on other firms. In this paper, we model th e interaction of public authority service strategies and firm location choices. We show that a self-interested regional authority can effect a welfare-improving distribution of economic activity when compared w ith an economy without an authority or an economy with local authoriti es. However, we also show that the conditions under which the authorit y would induce a welfare enhancing distribution depends on the authori ty's strategic posture, as well as the nature and size of public subsi dies for the authority. The conditions necessary for a regional author ity to choose an efficiency enhancing strategy may be difficult to ach ieve.