Empirical Tests for Allocative Efficiency in the Local Public Sector

This article reports evidence from two tests for allocative efficiency in the local public sector using micro-based data. The first test is based on Brueckner's (1979, 1982) theoretical result that a nonpositive relationship between public services and residential property values is a definite indicator of over provision of local public goods beyond optimal levels in the case of typical mixed communities, that is, communities having substantial business property. This article points out the limitations of Brueckner's empirical analysis and provides a stronger empirical test of allocative efficiency in the local public sector using micro-based data. An alternative test that uses the criterion that, when the level of local spending is optimal, a balanced budget change in local spending and residential property taxation should leave residential property values unaltered, is also presented. Both the tests suggest overprovision of local public goods in metropolitan Edmonton, Canada.