Efficiency in public infrastructure provision: a theoretical note

Purpose – The purpose of this paper is to shed new light on the debate about the appropriateness of the Kaizuka rule, a Samuelson type of efficiency rule for public inputs, for the provision of firm‐augmenting public inputs. Firm‐augmenting public inputs are commonly included in public infrastructure modelling. Design/methodology/approach – In the microeconomic social surplus framework, and assuming perfect competition, the paper analyses how firm‐augmenting public inputs should be provided in order to maximise the welfare of consumers and producers. For this purpose, the paper develops a social surplus efficiency rule, i.e. the Boadway rule. Afterwards the question what the characteristics of firm‐augmenting public inputs mean for its efficient provision is examined. Findings – The findings show that under perfect competition an omniscient government is unable to efficiently provide firm‐augmenting public inputs due to the characteristics of firm‐augmenting public inputs but not due to inappropriate efficiency rules. Research limitations/implications – The findings show that future research would be ill advised to model public infrastructure as a firm‐augmenting public input. Practical implications – Policy conclusions drawn from models that include firm‐augmenting public inputs, such as fiscal competition and endogenous growth models, should be reconsidered. Originality/value – The paper makes a strong case that firm‐augmenting public input is not a viable concept for modelling public infrastructure. Rather, firm‐augmenting public inputs are similar to free goods.