Quantifying the cost of foregone public goods spillovers on an island

We develop a framework for quantifying the cost of the lack of public goods spillovers from neighbouring municipalities for a geographically separated municipality. We use parameter estimates from a spatial panel regression of local public expenditure in 205 municipalities in England, Scotland and Wales to identify the extra budget that a remote municipality would require in order to provide the same level of public goods as without separation. We illustrate our approach by applying it to the case of the Isle of Wight and estimate its annual cost of foregone public goods spillover to be about a quarter of the Island's actual annual local public spending.