Provision of Public Services and Industrial Location

The literature that studies the effects that the government activity produces in the location decisions of the economic agents is relatively limited. In this work we introduce the public sector in Krugman's core-periphery model in order to contribute to solve this deficiency. The government provides public services, financed with different taxes. The main results are two. First, the public services are an element that attracts activity, while the taxes act in contrary sense. Consequently, the net effect is indeterminate and depends fundamentally on the subjective valuation that the individuals give to the provision of public services. Secondly, the introduction of new parameters in the model, those corresponding to the public sector, alters the influence on the equilibrium of those already existent. In particular, the effects of the transport cost on the concentration-dispersion results are not monotonous, now depend on the transport cost magnitude.