Infrastructure financing and urban development:: The economics of impact fees

Abstract Historically, additions to public infrastructure necessitated by urban growth have been financed under a cost-sharing approach. In the last several decades, however, financing of growth has increasingly relied on land-use exactions, where new residents pay for the cost of incremental infrastructure. Despite the emergence of a formal growth-control literature, there has been virtually no formal analysis of the connection between infrastructure financing and urban development. To provide such an analysis, this paper investigates three different schemes for financing incremental infrastructure within an urban growth model. The analysis compares an impact-fee scheme to two types of cost-sharing schemes, deriving the effects on urban growth and land values of switching to the impact-fee scheme. The efficient financing scheme is also identified.

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