PRICE SPECIFICATION AND THE DEMAND FOR PUBLIC-GOODS

Nearly all public expenditure demand studies define the marginal price for publicly provided goods as the household's share of the local property tax burden, or what is often called the tax- price. Such a definition is at odds with two familiar facts: taxes are ordinarily distortionary, and property values are often influenced by the value of local services. This paper constructs a theoretically consistent marginal tax-price measure incorporating these considerations. The new measure demonstrates that previous estimates of the price and income elasticities of demand for public services are biased, except under very restrictive circumstances. Moreover, the direction of this bias will depend upon the actual incidence of public spending and the tenure status of residents. © 1990.