A Normative Analysis of Impact Fees for Suburban Commercial Development

Using a circular city model to represent commercial development in a suburban setting, we present a normative analysis showing that complete reliance on impact fees is economically superior to any alternative relying on taxes levied on households. The reason is that impact fees allocate the cost of maintaining infrastructure services to those who benefit from the commercial development, whereas tax financing creates a fiscal externality wherein part of the cost of a commercial development is borne by households other than those who benefit, leading to inefficient over entry.