Public Infrastructure Investments, Productivity and Welfare in Fixed Geographic Areas

Abstract

Measures of the value of public investments are critical inputs into the policy process, and aggregate production and cost functions have become the dominant methods of evaluating these benefits. This paper examines the limitations of these approaches in light of applied production and spatial equilibrium theories. A spatial general equilibrium model of an economy with nontraded, localized public goods like infrastructure is proposed, and a method for identifying the role of public capital in firm production and household preferences is derived. Empirical evidence from a sample of large U.S. cities suggests that while public capital provides significant productivity and consumption benefits, an ambitious program of locally funded infrastructure provision would likely generate negative net benefits for these cities.