Profit maximizing communities and the theory of local public expenditure

This paper examines profit maximization as a normative criterion for communities in a large metropolitan area. We develop a Tiebout-like model of residential location, define the “profits” of a community, and show that profit maximization leads to the efficient provision of public services and optimal community size. Communities do not in general act as profit maximizers, however, because individual property owners may not all share in a community's profits. Two institutional reforms are therefore suggested that would alter the distribution of profits in a way that makes the self-interested actions of property owners consonant with community profit maximization.