Regional Science and Urban Economics30 (2000) 45–57

www.elsevier.nl / locate / econbase

Local public goods and their capital-gain effects

Komei Sasaki*
Graduate School of Information Sciences, SKK Building, Katahira 2, Aoba-ku, Sendai 980 -8577,
Japan
Received 14 January 1999; received in revised form 25 June 1999; accepted 5 August 1999

Abstract

An attempt is made to analyze the capital-gain effect of local public goods and to
investigate the conditions under which the efficient provision of local public goods and
optimal population size are realized. This requires a two-period model where an owner-
resident takes into consideration the effects of public good provision on both the utility
from their consumption and the land value. In this study, the Brueckner-Joo model
[Brueckner, J.K., Joo, M.-S., 1991. Voting with capitalization. Regional Science and Urban
Economics 21, 453–469] is improved so that internal consistency is met, and optimal
population size is determined as well. As for the allocative efficiency test of public goods
provision, a hypothesis different from that of Brueckner–Wildasin is derived. Where public
goods are provided by current residents on the basis of their capital-gains motivation, the
sign of the coefficients of public good variables in the land price regression gives different
signals to different groups of residents, concerning the efficiency of public goods provision.
It is also shown that the optimal population size in a city is necessarily larger than the
efficient size which minimizes the per capita provision cost of public goods. This suggests
that, under the capital-gain hypothesis, the coefficient of population size must be
significantly negative in the land price regression.  2000 Elsevier Science B.V. All rights
reserved.

Keywords: Local public goods; Capital gain; Allocative efficiency test of public goods provision;
Optimal urban population size

JEL classification: H41; R11; R20

*Fax: 181-22-263-9858.
E-mail address: sasaki@skk.is.tohoku.ac.jp (K. Sasaki)

0166-0462 / 00 / $ – see front matter  2000 Elsevier Science B.V. All rights reserved.
PII: S0166-0462( 99 )00031-9
46 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57

1. Introduction

Many authors have discussed the capitalization of local public goods provision
into land or housing values. Brueckner (1979, 1982, 1983) and Wildasin (1979,
1986) derived the cross-section capitalization hypothesis in the setting of one-
period model where suppliers of public goods do not consume those public goods.
Henderson (1980, 1985), and Miceli (1991) analyzed the public goods effect on
property values in a two-period model to describe the conflict of interest of two
groups of people, each residing in a city during different periods.
If public goods levels are determined by the votes of owner-occupied residents
and the public goods are consumed by them as well for some period, then the goal
of their votes is not simply to maximize the capital-gain or the resale value of their
housing, but to maximize the utility incorporating both the utility of public goods
consumption and the capital-gain profit from housing resale.1 The model of Yinger
(1982) rests on the hypothesis that owner-occupied residents decide on a public
good-tax package so as to maximize their utility, but the capital-gain effect of
public good provision was not incorporated explicitly in the model.
Brueckner and Joo (1991) seem to be the only authors to incorporate both
aspects of land (or housing) as consumption and investment goods in determining
the public good level. In their model, a voter lives in a city for two periods after
the vote is taken, and at the end of the second period he sells his house and leaves
the city. In the vote, he determines the ideal public good level in addition to the
consumption of private goods during the two periods, and the wealth when he
leaves the city so as to maximize the two-period utility. His house is bought by a
new entrant at a price which depends on the public goods level. The presence of
the new entrant is reflected in the price change of housing. Since public goods are
consumed by both the voter and the new entrant, the selected public goods level
reflects not only the voter’s preference but also that of the new entrant, although
the provision level is determined only by the voter. The important result of
Brueckner and Joo (1991) is that ‘‘if the voter’s demand for public spending is
high (low) relative to the buyer’s, then his ideal public good level is above (below)
the property-value-maximizing level’’.2
However, the model in Brueckner and Joo (1991) is restrictive in that
population size in a city is held constant, although an optimal population size

1
This ‘hybrid’ goal can be interpreted as a result of ‘imperfect mobility’: if there is no barrier to
mobility, a house owner will vote for a public goods provision maximizing his capital-gain in his
original city, and then move to another city where public good level is determined so as to maximize
his consumption utility (see Sonstelie and Portney, 1980; Brueckner and Joo, 1991).
2
An interpretation of this result in the context of housing price regression is as follows: if the partial
derivative of housing price with respect to public goods level is positive (negative), then the public
goods level is too high (low) for a current resident and too low (high) for a new resident relative to
each efficient provision level.
 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57 47

might exist where scale economy and diseconomy operate on public goods
provision due to some fixed factors and congestion phenomena, such that the per
capita cost share of provision of public goods is minimized given the amount of
public goods. Also, housing size is assumed to be fixed in their model although it
is likely to vary in response to a change in circumstances. How is the optimization
rule for public goods provision obtained in the Brueckner and Joo (1991) model
modified in the setting of flexible housing size and variable urban population? Is
the optimal population for voters larger or smaller than the efficient size? These
questions requires an answer and it is stressed that the estimation result of land (or
housing) price regression with public goods level being explanatory variable
cannot be interpreted appropriately until the above questions are answered.
The present paper intends to generalize the work of Brueckner and Joo (1991),
by allowing the house size and the number of new entrants to vary, and to analyze
the capital-gain effect of local public goods and the optimal population size in a
city so as to derive testable hypotheses. In Section 2, the behavior of a resident in
a two-period setting is discussed. Section 3 analyzes the capital-gain effect of local
public goods. Optimal population size is investigated in Section 4. Some results
are summarized in Section 5.

2. The behavior of a resident

The aim of the model is to integrate the consumer and the investor aspects of an
initial resident in order to analyze the capital-gain effect of a package of local
public goods and tax payments. The setting of the two-period model employed for
achieving the goal is shown in Fig. 1, where the present time is denoted by t 01 .
Suppose that N0 people moved into a city at time t 0 in the past, and will move
out of the city, selling their houses, at time t 1 in the future, and that N1 new
residents will buy the houses of N0 current residents and start living in the city at
t 1 . In this setting, people are assumed to stay in the city during two periods, the
length of which is st 1 2 t 0d. The assumption for the behavior of a resident is as
follows. A current resident passively behaved at time t 0 in that he (or she) decided
only residential lot size h 0 , and composite goods x 0 (which are consumed during
the first period from t 0 to t 01 ), given the public goods consumption Z0 and its cost
share C (Z0 ,N0 ) /N0 during the first period. At t 01 , the beginning of the second
period, the current residents will behave actively, such that they will determine the
level of public goods Z1 , the service of which will be provided for two periods
after t 01 . (By the repeat of this cycle of residents, new residents will behave
passively at t 1 : they will take Z1 and CsZ1 ,N1d /N1 as given). An interpretation is as
follows. Residents for the first period from t 0 to t 01 are ‘young’ and those from the
second period from t 01 to t 1 are ‘old’. (Then at t 1 another young person moves in.)
Note that, in this model, the same amount of local public good is consumed during
the two periods by the two different groups of residents once it is provided: in Fig.
48 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57

Fig. 1. Structure of the two-period model.

1, Z0 was consumed by current residents during one period from t 0 to t 01 , and by

the immediately previous residents for one period before t 0 ; while Z1 is consumed
by current residents during one period from t 01 to t 1 , and will be consumed by
subsequent entrants for one period after t 1 . This assumption seems realistic since
various infrastructures considered as public goods (e.g., roads, parks, school
buildings, and the sewerage system) last a long time.3
Throughout the analysis, it is assumed that the per capita cost of public goods
provision takes a U-shaped form with respect to population size: that is,

]]
SD
C
≠ ]
N
c0
≠N

according as N c N˜ sZd. As population increases, the scale economies in production

work predominantly in the initial stage, then, beyond a certain size of population,
the congestion effect in consumption becomes predominant.

3
The setting of timing in Fig. 1 is contrived, with the intention of clarifying what level of public
goods the current residents consumed when they moved into the city, or when the new entrants vote on
the public goods level after the current residents leave the city. These points were not explained
explicitly in Brueckner and Joo (1991), but we note that the ‘passive’ behavior of a resident during the
first period does not affect his ‘active’ behavior during the second period, so the scheme of the active
behavior for deciding the public good level is fundamentally the same as that of Brueckner and Joo
(1991).
 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57 49

3. The capital-gain effect of local public goods

It is hypothesized that, to maximize utility, current residents actively decide, at

t 01 , on public goods provision Z1 , and the number of new entrants N1 , at t 1 , in
addition to the quantity of composite good consumed during the period from t 01 to
t 1 . The problem is formulated as follows:

Max U (x 1 ,h 0 ,Z1 ,W ) (1)

hx 1 ,Z 1 ,N 1 ,W j

DS]]]] D
n
( p1 2 p0 )h 0
s.t. W 5 ]]]] 1 ] 2 d
i
p1
i
S N h 2N h
1
N
0

0
0 0

S C(Z1 ,N0 )
1 (1 1 i) y 1 2 p0 h 0 2 x 1 2 ]]]
N0 D (2)

where i is the interest rate, p1 is the price of unit housing service and thus p1 /i is
the sale price of unit housing stock (or unit lot) at t 1 . p0 h 0 /i is the money
borrowed for purchasing the residence at t 0 when a current resident moved into the
city, and this debt will be cleared at t 1 . Thus, a current resident pays the interest
cost p0 h 0 , every year, which is regarded as the price of the housing service. W in
(2) is the monetary asset a current resident will have at time t 1 , which becomes an
argument of the utility function in the second period because it provides a better
life after leaving the city or it is left to children as inheritance. In the formulation
of (2), a perfect capital market is assumed. The first term on the RHS in (2) is the
capital-gain from the sale of his (or her) own residence. The second term expresses
the per capital net revenue from the sales of expanded area when the total demand
for land, N1 h n0 , exceeds the existing urban area N0 h 0 , where d is per area
development cost including the acquisition cost of undeveloped land. It is
implicitly assumed that the necessary area of undeveloped land can always be
obtained at the predetermined price, say s, from absentee landlords.4 This implies
that current residents become owners of the undeveloped land at t 1 , which will be
instantly developed and converted to residences for new residents. It must be
assumed that the decision on how much undeveloped land to acquire is made at
t 01 , but the actual transaction is undertaken at t 1 . The third term in (2) is the
savings (or borrowing, if it is negative) for one period from t 01 .
The price of a unit residential lot (housing) p1 /i, is determined by the passive
behavior of a new resident in the following way.

4
When the demand for land at time t 1 is less than the total area of current residences, i.e.,
N1 h 0n , N0 h 0 ,the city size shrinks and the redundant area will be sold to the agricultural sector or other
regions at the price s, and the revenue s(N0 h 0 2 N1 h 0n ) will be divided equally among current residents.
50 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57

n n C(Z1 ,N1 )
y 0 2 x 0 2 ]]]
N1
p1 5 Max ]]]]]] n (3)
n n
hx 0 ,h 0 j h0
¯
s.t. U 5 U (x 0 , h 0n ,Z1 )
n n n

The suffix n stands for ‘new resident’ at t 1 . Under an open city setting, the utility
level attained in a city during the first period from t 1 is equal to that prevailing in
the rest of the world, U¯ n . Given this utility level, along with public goods level Z1 ,
population size N1 and, therefore, per-capita tax payment C /N1 , the bid-rent p1 is
maximized.5 As a result, the loan of money to a new entrant is determined to be
p1 /i. Solving (3), we obtain

p1 5 p1 (Z1 ,N1 ; U¯ n ,y n0 )
h n0 5 h n0 (Z1 ,N1 ;U¯ n ,y n0 ) (4)
x n0 5 x n0 (Z1 ,N1 ;U¯ n ,y n0 )

By the envelope theorem, the following comparative statics are obtained:

≠p Cz (Z1 ,N1 )
]1 5 2 ]]] n n
1m Uz
≠Z1 h n0 N1
1
H
Cz (Z1 ,N1 ) U zn
5 ]n 2 ]]] 1 ]n
h0 N1 Ux J (5)

≠p
]1 5 2 ]n ]]]]]]]
≠N1 h0 H
1 CN (Z1 ,N1 )N1 2 C(Z1 ,N1 )
N 12 J (6)

in which m n is the Lagrange multiplier associated with the constraint in (3).

Let Z *1 denote the public good level such that ≠p1 / ≠Z1 5 0 at Z 1* in (5). Under
the assumption that public goods are non-inferior goods and that the marginal cost
of public goods is increasing, it holds that
≠(U nz 1 /U nx 1 )
2 ]]]]
≠ p1
]] 2 *
≠Z 1 1 1
z 5z *
Cz 1 z 1
5 2 ]]n 1 ]]]]
N h
1 0
≠Z1
h n0
,0

Thus, the unit land price, p1 /i at t 1 takes a maximum where Z1 5 Z *1 . From (5),
the Samuelson condition N1 (U nz ) /(U nx ) 5 Cz (Z1 ,N1 ) holds at Z 1* , and in this sense
public goods are provided efficiently to new entrants.

5
It is assumed that, in solving the problem in (3) at t 1 , new residents expect that they can actively
determine the public good level at the time one period after t 1 .
 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57 51

Let us go back to the problem in (1) and (2). The Lagrangean is formulated as
follows:

H DS]]]] D
n
( p1 2 p0 )h 0
V 5 U (x 1 ,h 0 ,Z1 ,W ) 2 l W 2 ]]]] 2 ] 2 d
i
p1
i
S N h 2N h
1
N
0

0
0 0

S C(Z1 ,N0 )
2 (1 1 i) y 1 2 p0 h 0 2 x 1 2 ]]]
N0 DJ (7)

The optimality conditions of (7) are written as:

x 1 : Ux 1 5 l(1 1 i) (8)

W: UW 5 l (9)

H S D
n
1 ≠p1 1 ≠p1 N1 h 0 2 N0 h 0
Uz 1 5 l 2 ] ]h 0 2 ] ] ]]]]
i ≠Z1 i ≠Z1 N0
Z1 : (10)
p1
S N1 ≠h 0n
D
2 ] 2 d ] ] 1 (1 1 i)]]]
i N0 ≠Z1
Cz (Z1 ,N0 )
N0 J
N1 : 5 1 ≠p1
S
≠p1 1 N1 h 2 N0 h 0n
0p1
l ] ]h 0 1 ] ] ]]]] 1 ] 2 d ]]]]]
n ≠h n0
h 0 1 N1 ]
D ≠N1
S D
S D6
i ≠N1 ≠N1 i N0 i N0
50 (11)
Using (5) and (8)–(10), the condition for optimal provision level of public goods
is obtained in the form:
Uz 1 Uw ≠p1 1
Fn p1 ≠h n0
N0 ] 1 ] ] ]N1 h 0 1 ] 2 d N1 ]
Ux 1 Ux 1 ≠Z1 i i ≠Z1
S D G
Uz 1 Uw N1
FH
Cz 1 (Z1 ,N1 ) U nz
5 N0 ] 1 ]] ] 2 ]]] 1 ]n 1 ] 2 d N1 ]
Ux 1 U x 1 i N1 Ux
p1
i
≠h n0
≠Z1 J S D G (12)

5 Cz 1 (Z1 ,N0 )

The optimum condition in (12) implies that the marginal benefit to current
residents due to an increase in public goods provision, which is a sum of the
consumption benefit, N0 (Uz 1 ) /(Ux 1 ), and the capital-gain benefit from the land
price increase

] F
Uw ≠p1 1
Ux 1 ≠Z1 i
p
S≠h n
] ]N1 h 0 1 ]1 2 d N1 ]0
i ≠Z1
D G
is equal to the marginal cost of public good provision. If residential lot size does
not depend on public goods level, as assumed in the literature so far (i.e.,
≠h n0 / ≠Z1 5 0), then Z1 is short (in excess) of the optimal consumption level of new
52 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57

residents, but is in excess (short) of the optimal consumption level of current

residents for ≠p1 / ≠Z1 . 0 (≠p1 / ≠Z1 , 0).6
Taking (8) and (9) into consideration, (12) can be rewritten as:
n
Uz 1 1 N1 U z 1 1
N0 ] 1 ]] ] ]n 5 Cz 1 (Z1 ,N0 ) 1 ]] ]Cz 1 (Z1 ,N1 )
Ux 1 1 1 i i U x 11i i
≠h n0
1 p1
S
2 ]] ] 2 d N1 ]
11i i ≠Z1
D (12-1)

If the assumptions in Brueckner and Joo (1991) are imposed, that is, N0 5 N1 5 N,
C(Z,N) 5 cZN, and ≠h n0 / ≠Z1 5 0, the equation in (12-1) is reduced to:
Uz 1 U nz
(1 2 b ) ] ]
1b n 5c (13)
Ux 1 Ux

where
1
b 5 ]]]].
1 1 i(1 1 i)
The relation in (13) is essentially the same as that in (6) in Brueckner and Joo
(1991), indicating that, at optimum, a weighted average of the current resident’s
MRS and the new resident’s MRS equals the marginal cost of public goods
provision.
Rearrange (13) into

(1 2 b ) H
Uz 1
]
Ux 1 J H J
2c 1b
U nz
]
U xn
2c 50 (14)

The relation (14) implies that the selected provision level of public goods is, in
general, too high for one group of residents and too low for another group of
residents (if Z *1 is selected, it is the optimal consumption level for both groups).
Noting that
Un
]zn x c
Ux
as Z1 c Z *1 (property-maximizing level), the relation (14) indicates that
Uz
] xc
Ux 1

6
The optimal consumption level of public goods is defined as the value of Z that satisfies the
Samuelson condition.
 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57 53

as Z1 x Z *1 . Thus, it follows that Z1 x Z *1 as

S DS D
Uz U nz
] x ]n ,
Ux 1 Ux

implying that if the current residents’ demand for public goods is high (low)
relative to the new residents’, then the optimal public good provision is above
(below) the property-value-maximizing level (see Brueckner and Joo, 1991, p.
459).
However, when the residential lot size and the size of population are variable,
the allocative efficiency of public goods provision for current residents is
ambiguous, even if relative size between Z1 and Z 1* is known (i.e., the sign of
≠p1 / ≠Z1 is known).7 In general, it will not be the case that ≠h n0 / ≠Z1 5 0. An
increase in Z1 has two opposing effects on h 0n . In determining the bid-rent in (3),
the per capita provision cost of public goods, and so tax payment, C(Z1 ,N1 ) /N1
increases with Z1 , whereby a new resident’s disposable income decreases so as to
increase the housing size (budget effect). On the other hand, the utility U n
increases with Z1 , which will decrease the demand for housing in attaining a given
utility level (utility effect). Thus, when the budget effect (utility effect) prevails,
≠h n
≠Z1
≠h n
S
]0 . 0 ]0 , 0
≠Z1 D
8
emerges.
If Z1 is smaller (larger) than the property-maximizing-level, Z *1 , then the public

7
The assumption of quasi-private-good type of public goods (i.e., CsZ,Nd 5 cZN) is not necessary for
deriving the property implied by Eq. (14).
8
When the utility function of a new entrant is specified in log-linear form

U n 5 a logx n0 1 b logh n0 1 g logZ1

we obtain the following for optimal housing size:
≠h n0
S D a CZ 1 (Z1 ,N1 )
a
g C(Z1 ,N1 ) 2] g

3 D4
]
] 5 2 AZ 2 b y 0n 2 ]] b ] 2 ]]]]] ,
≠Z1 1
N1 Z1
S n
N1 y 0 2 ]]
C(Z1 ,N1 )
N1
in which A is a function of constant coefficients. This relation suggests that, when the marginal utility
of public goods, g /Z1 , is relatively high, the utility effect tends to prevail, so ≠h n0 / ≠Z1 , 0.
When the decrease of utility due to the decrease of composite goods consumption (a decrease
equivalent to the decrease of disposable income),
CZ
a ]]] )
n C
N1 ( y 0 2 ] )
N1
n
is relatively large, the budget effect tends to prevail, resulting in ≠h 0 / ≠Z1 . 0.
54 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57

goods level is too low (high) for new residents. In this situation, if the lot size
increases (decreases) as the public goods level is increased, i.e.,

≠h n
≠Z1 S
≠h n
]0 . 0 ]0 , 0 ,
≠Z1 D
the public goods level is too high (low) for current residents in that N0 (Uz1 ) /
(Ux1 ) , CZ 1sZ1 ,N0d(N0 (Uz1 ) /(Ux1 ) . CZ 1sZ1 ,N0d). But. If the lot size decreases
(increases) with public good to the extent that the parenthesized term on the first
(or the second) line in (12) is negative (positive), then it follows that the public
good level is too low (high) for current residents. Putting it another way, there is a
possibility that the public good level is too low ( high) for both current and new
residents, which is a distinct difference from the result in Brueckner and Joo
(1991).

4. Optimal population size

In our model, unlike that of Brueckner and Joo (1991), residential lot size is
assumed to be variable (among different groups of residents) depending on public
goods level. It is also hypothesized that the urban area can be flexibly expanded by
converting agricultural land. Thus, current residents are motivated to expand the
city size and to attract more new residents as far as the sale price of land exceeds
the development cost. However, too large population will raise the per capita cost
of public goods provision because of the congestion phenomenon, and thereby will
cause the price of residential lots to fall. Therefore, it is hypothesized that some
optimal population size exists for current residents. In this circumstance, the
number of new residents should be treated as a variable. In this section, we
investigate the optimality condition of urban population size.
Assuming l ± 0,the relation in (11) is reduced to

1 N0 h 0
] ]] H
i N1 h 0n N1 1 1
C(Z1 ,N1 )
N1
p1
i JS n
C (Z ,N ) 2 ]]] 5 ] 2 d s1 1 hhNdh 0 D (15)

where

≠h n0 N1
hhN 5 ] ]n .
≠N1 h 0

Let N 1* denote efficient population size such that CN1 (N *1 ,Z1 ) 5 C(N *1 ,Z1 ) /N1 , and
thus from (6), it holds that ≠p1 / ≠N1 5 0 at N1 5 N 1* . It is seen from (6) that
 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57 55

≠ 2 p1
]]
≠N 21
* N 1 5N 1 *
1 CNN
5 2 ]n ]] , 0
h 0
N1

where CNN . 0. That is, at N 1* the per-capita provision cost is minimized, given
Z1 , and the land price is maximized. Around N 1* ,

S
C(Z1 ,N1 )
≠ ]]]
]]]]
N1
50
D
≠N1

so the disposable income of a new resident,

n C(Z1 ,N1 )
( y 0 2 ]]] )
N1

does not change even if N1 is increased. Therefore, given U¯ n and Z1 , neither x n0 nor
h n0 change (i.e., hhN 5 0) even if N1 changes around N 1* . In these circumstances,
the LHS in (15) is equal to zero. On the other hand, the RHS in (15) cannot be
zero but must be strictly positive (to be

S]pi 2 dDh
1 n
0

since hhN 5 0). Thus, the relation (15) cannot hold at N1 5 N 1* : in other words, the
optimal number of new entrants (to current residents) is not the efficient
population size that minimizes the public good provision cost per new resident.
Next, suppose that the optimal population size is larger than the efficient size
N 1* , so that CN1 (Z1 ,N1 ) . C(Z1 ,N1 ) /N1 and thus ≠p1 / ≠N1 , 0. In this situation, the
disposable income of a new resident decreases with N1 , since

S
C(Z1 ,N1 )
≠ ]]]
]]]]
N1
. 0,
D
≠N1

and thereby ≠h n0 / ≠N1 . 0 in (4). Therefore, for such N1 , the relation (15) can hold,
so an optimal population size can be larger than N 1* . If the optimal population size
is unique, that is, the Lagrangean in (7) has a single peak with respect to N1 , then
the optimum of N1 is larger than the efficient size, N 1* ,since the LHS of (11) is
positive at N1 5 N 1* , (which is equal to
56 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57

] S
UW p1
D
] 2 d h n0 )9 .
N0 i
The reason why the optimal population size is larger than the efficient size can be
explained as follows: an additional entrant to a city decreases the land price, but
increases the lot size of a new resident, and as a result the capital-gain per current
resident increases.10

5. Concluding remarks

An attempt has been made to analyze the capital-gain effect of local public
goods and to investigate the conditions under which the efficient provision of local
public goods and optimal population size are realized. For the analysis of
capital-gain effect, a proper two-period model is needed where an owner-resident
takes into consideration the effects of public goods provision on utility from both
their consumption and the land value. In this study, the model of Brueckner and
Joo (1991) was generalized so that residential lot size is treated as variable and
optimal population size is determined as well. The main results are summarized as
follows.

1. In the Brueckner and Joo model, the allocative efficiency test of public goods
provision is unambiguous for both current and new residents: if the public
goods level is higher (lower) than the property-maximizing level, then it is too
low (high) for current residents and too high (low) for new residents relative to
each efficient provision level. On the other hand, in our model, where
residential lot size is variable, the allocative efficiency test of public goods
provision is ambiguous for current residents while it is unambiguous for new
residents. There is a possibility that the public goods level is too low (high) for
both current and new residents.

9
Under the log-linear utility function in footnote 8, we obtain the following for optimal housing size:

≠h n0 S C
CN1 2 ] D
S D
a
g
2]
N1 C 2 ] 21
] 5 Aa Z b ]]] y n0 2 ] b ,
≠N1 N1 N1
and thus

10
a
S
hhN 5 ] CN1 2 ]
b
C
N1 DS C 21
y 0n 2 ]
N1
. D
It is thus concluded that the sign of the coefficient of population size in the property value
regression must be significantly negative if a city is formed on the basis of the capital-gain motivation
of current residents.
 K. Sasaki / Regional Science and Urban Economics 30 (2000) 45 – 57 57

2. In the setting where current residents can determine the number of new entrants
to a city (e.g., by means of zoning) the optimal population size is never equal to
the efficient size which minimizes the per capita provision cost of public goods.
If the optimal size is unique, then it is necessarily larger than the efficient size.
This suggests that, under the capital-gain hypothesis, the coefficient of
population size must be significantly negative in the land price regression.

Our model assumed that all existing residents move at the end of the two
periods, when new residents enter a city: i.e., two different groups of residents
(e.g., the young and the aged) do not live together. Of course, it is more realistic to
model the co-existence of two such groups of residents. Thus, a necessary
extension of this paper is to analyze the capital-gain effect of public goods in an
overlapping generation model, although this will be very complex.

Acknowledgements

I wish to thank the editor and two anonymous referees for their useful
comments. This research was supported in part by Grant-in-Aid for Scientific
Research (C), which is gratefully acknowledged.

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