In this paper, we try to analyze the optimalsize of Local Public Sector under the application of Henry-George Theorem. We use it to compare the simulated expenditure to the current one in Japan.
Central government expend its budget for the local government, but we can't recognize their volume is optimal or not.
The idea is based on that all the jurisdictional activity depends on its center, Tokyo area, and their economic activity have close relation to their rent and change inversely proportional to their distance from Tokyo.
It is important for us to plan their optimal budget without any biased point of view or any macroeconomic fluctuations.
The application of Henry-George Theorem is proposed to solve the problems. The theory says that in the long term the total differential rent is equal to the investment in the central area. We can understand the investment as the expenditure for the local government. (The differential rent is the total rent minus the transportation cost.) We can recognize the transportation cost as the cost for the local government to get the services or information. It is sure that its equilibrium is the long term one, but it suggests the optimal volume.
The data is the cross-sectional one, and the test shows that there is possibility of heteroscedasticity. We use the weighted least square to relief it.
The result is that the total differential rent is too high against the size of local public expenditure in 1993. We can say that the local government size is too small against the total differential rent, but we should analyze the data more for a few years.