A Cost-Benefit Location-Allocation Model for Public Facilities: An Econometric Approach

This research develops and operationalizes a facility location-allocation model based on cost-benefit principles derived from welfare economics. Despite the theoretical advantages of cost-benefit location-allocation models, the difficulties associated with estimating household preferences for public facilities have heretofore prevented their application. This research demonstrates that the hedonic-pricing methodology can be effectively used to estimate preferences for public facilities. Specifically, household preferences for Baltimore public middle schools were estimated from the spatial variation in housing prices using the random bidding model. To provide an example of the methodology, the cost-benefit location-allocation objective function was maximized to simultaneously determine the optimal number, quality, and locations of Baltimore middle schools. The cost-benefit approach to facility location constitutes a major improvement over existing methods because it directly incorporates user preferences into the objective function and because the number and quality of facilities can be determined endogenously rather than being specified as a constraint a priori.