Essays in Honour of Karl-Göran Mäler
New Horizons in Environmental Economics series
Edited by Bengt Kriström, Partha Dasgupta and Karl-Gustaf Löfgren
Chapter 17: Mobility and Capitalization in Local Public Finance
: a reassessment David A. Starrett 1 INTRODUCTION Karl-Göran Mäler (1971), (1974) was one of the pioneers in formulating and identifying hedonic methods, by which I mean methods for learning about preferences for public goods by observing behavior on related private goods markets. These methods have been developed extensively since then and have figured prominently in the recent theories of local public finance (see Scotchmer 1985; Wildasin 1986; and Starrett 1988, who gives references to earlier literature). There, land values play the role of hedonic indicator. It is argued that improvements in amenities at home will raise land rents (thus, benefits are capitalized into land values) and local ‘club’ managers who own the land will have appropriate incentives to institute such improvements. Thus, in this circumstance, land values become the perfect hedonic measure of environmental improvement, satisfying conditions proposed and explored by Mäler (1971, 1974). However, as Mäler recognized and as has become clearer from subsequent work (for example, Freeman 1979 and Johansson 1987), such hedonic measures are very sensitive to the structural assumptions made. There are two such assumptions in the local public finance literature, which taken together have very strong implications for welfare economics. These assumptions are: (i) that there is free mobility among communities and (ii) that one community is insulated from the actions taken by other communities. In their strongest versions, these two assumptions interact to guarantee that local public decision making cannot make anyone worse off and under weak behavioral assumptions must...
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