Unlike the typical issue in which optimality requires some amount of local public goods provided in every town/locality, determining the best location for an indivisible local collective good, is not straightforward by merely appealing to the Pareto efficiency criterion. If two cities are considered, the welfare possibilities frontier associated with the location of a particular good in one city not always dominates or is dominated by its counterpart in the other city. Three alternatives are suggested to solve this indeterminacy issue: disregard the equity criterion, shun the Pareto efficiency criterion, or complement the latter with some distributive criterion. In the present study, several approaches deciding on this issue are evaluated, viz., a social welfare function, Kaldor and Rawls criteria, unanimity, simple majority and despotism.

Many of the goods provided by the public sector, e.g., roads, reservoirs, stadiums etc., have clear local public good characteristics. Therefore, the location issue is more complex than in the case of pure private goods. The presence of local public goods involves lack of convexity, which modifies the type of problem to be solved. In an economy with pure private goods, both the existence of a solution and its uniqueness are guaranteed. However, the existence of a local public good disrupts these regularity conditions. In particular, the interesting characteristic of a unique solution is lost.

While for a private good suffice it to find the quantity of optimal production, in the case of a local public good (such as a swimming pool or a museum), the optimal quantity of users must be determined for each unit—the size of the club—and also the number of units and their specific location. The term `local public good' was first used in the economics literature by Tiebout (1956), who reacted to the public goods problem highlighted by Samuelson (1954) by indicating that for some public goods, subject to congestion, there was a decentralized mechanism for achieving optimal allocations.

Since their seminal work, Samuelson (1954) and Tiebout (1956) have inspired a vast literature to analyze different aspects of local public goods provision. In that respect, Edelson (1976), who related voting decisions to the maximization of home market values, assuming that these include the value of the provision of local public goods. Lea (1979) incorporated welfare theory into models of public facility location. Boadway (1982) and Starret (1982) studied local government spending decisions. Rose-Ackerman (1983) indicated the importance of incorporating political decision making into the analysis of local public goods. Greenberg (1983) and Nechyba (1997) developed a general equilibrium model that included the existence of local public goods. Kunreuther and Kleindorfer (1986) analyzed the decision mechanism for the location of local public goods. Giles and Diamantaras (1997) analyzed the financing of local public goods. Wrede (1997) studied the use of interregional transfers by a central authority to solve the underprovision problem. Klaus and Storcken (2002) studied the location of a public facility in a Euclidean space. Blackwell and McKee (2003) investigated the role of preferences on individual willingness to contribute to the provision of a group (excludable) versus a global (non-excludable) public good. The research of Besley and Coate (2003) concentrates on the debate around centralized versus decentralized provision of local public goods.

Some good reviews on the subject can be found in, e.g., Stiglitz (1977), Thisse and Zoller (1982), Cornes and Sandler (1986), Wildasin (1987), Wildasin and Wilson (1991) or Scotchmer (2002).

Public Finance Journal, Local Public Goods, Economics Literature, Welfare Theory, Decision Making Process, Paretian Optimum, Welfare Possibilities Frontier, Social Welfare Function, Property Rights Market, Welfare Distribution, Paretian Terms.