A Land Capitalization Approach To the Efficient Provision of Urban Facilities

As is well known, location models are often subject to non-existence of equilibria; even when an equilibrium exists, it is seldom socially efficient. With these difficulties in mind, we design non-cooperative games supporting the optimal allocation in a spatial economy formed by a continuum of households and a small number of firms. To this effect, we introduce into a model of spatial competition the consumption of land by households. Using this process of land capitalization, we specify a firm's payoff as the sum of its profit and its contribution to the total land rent; firms choose price and location simultaneously. Households choose their location, lot size and consumption of the firms' product in response to firms' decisions. We show that, for a fixed number of firms, the unique Nash equilibrium is given by the socially optimal locations of firms together with marginal cost pricing. When the number of firms is variable, the optimal allocation can be sustained as a free-entry equilibrium