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INTRODUCTION AND OVERVIEW Recently the condition of the public capital stock, or infrastructure, has received a lot of attention in the popular press. One of the 1982 issues of Newsweek Magazine devoted the front page and a major section to stories concerning the deteriorating condition of highways, roads, and bridges in major US cities. In support of this picture of deterioration in the public capital stock, a recent Urban Institute study of the public capital stock in six US cities (New York, Cincinnati, Dallas, Boston, Oakland, and Cleveland) provides considerable detail on the condition and fiscal arrangements affecting capital outlays and maintenance of urban infrastructure (28). In addition, a recent congressional report explores the problems associated with deteriorating infrastructure (27). As a reflection of the dimension of the problem, New York City estimates that it would cost $34 billion to reconstruct or replace its old infrastructure. Most recently, the infrastructure problem has focused on the debate over the proposed increase in the gasoline tax to finance maintenance of a deteriorating highway system.

Why is there so much concern with the infrastructure? The following are two reasons. First, it represents a large component of total government capital stock, the financing of which has been undergoing a major shift. Musgrave (19) and Schneiderman (22) have estimated the state and local capital stock to be about three-fourths of total government capital (excluding military). Furthermore, capital outlays as a fraction of state and local budgets have steadily declined from a high of about 30% in the mid-1960s to less than 15% at present (22, 21 …