Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-13T22:32:25.164Z Has data issue: false hasContentIssue false

The effect of supply and demand shocks on the non-market valuation of local public goods

Published online by Cambridge University Press:  01 October 1999

J.R. DESHAZO
Affiliation:
Assistant Professor, School of Public Policy and Social Research, University of California at Los Angeles. Faculty Associate, Harvard Institute for International Development, Harvard University. E-mail: deshazo@ucla.edu

Abstract

For local public goods, supply or demand shocks may create periods during which it is welfare enhancing for households to undertake spatial arbitrage by relocating residentially. We point out that the magnitude and direction of the average benefit estimate obtained during such a transition period is likely to vary systematically depending upon the magnitude of the shock, the level of transaction costs and the extent to which other affected goods are substitutes or complements. We test a subset of our model's predictions using cross-sectional data on household demand for improved municipal services in post-socialist Romania. Our preliminary empirical analysis suggests that there have been substantial gains in welfare resulting from spatial adjustment following the opening up of housing markets. Furthermore, our results indicate that benefit estimates for improved water services during the transition may be substantially higher than long-run estimates. This limited evidence supports our concern that economists may recommend non-optimal levels of long-run investment, regulation, or user fees if they are unaware of the implications of future readjustment to supply or demand shocks.

Type
Research Article
Copyright
© 1999 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)