| While Samuelsonian pure public goods are not subject to congestion, the literature has long recognized the importance of congestion effects in a broad class of public goods (Bergstrom and Goodman 1973; Oates 1988). Congestion—the decline in individual consumption due to an increase in the size of the consuming group—is particularly an issue with discrete quasi-public goods that require large lump-sum investments for increased provision, such as public schools and fire stations/protection. As these discrete or “lumpy” public goods do not scale easily, large changes in the population of users are an important source of congestion effects and present unique challenges for rapidly evolving cities and towns. Previous work has shown that a more populous municipality will offer a wider range of services, which Oates (1988) attributes to the fact that some public goods require a substantial initial investment and therefore a sufficient number of taxpayers. But whereas that issue is concerned with population size and the large initial investment of a single unit of provision (e.g., a zoo and an airport), the questions we pose revolve around population change and the large expenditures necessary for an additional unit (e.g., a school and a fire station).1 Consider municipalities with a growing population. The increase in users creates congestion in the services of lumpy public goods, and the municipality must either ration the current levels of service or increase the level of service. If the growth in the population is not evenly divisible by the population served by an additional discrete unit of the public good, the municipality must raise taxes to increase the levels of service. This was the situation in the fast-growing southwest suburbs of Chicago during the 2000s, Denver in more recent years, and several other urban areas in the southeast and southwest areas in the United States. In the case of Chicago, the influx of new residents to the area’s cities and towns created congestion in schools, among other services, and the construction of new schools required public approval of increased taxes via a referendum. The public initially rejected increases in tax rates, thereby choosing to ration services, but eventually approved higher taxes to maintain per capita levels of services.2 Now, consider the case of a city or town with a declining population. |