| Summary: | This research explores from the perspective of new institutional economics the role played by local governments in the Chinese urbanization process. In conventional wisdom of city planning and economics, government is often considered as the opposite of the market: the public goods can only be supplied in special ways, different from that of the common goods. Institutions, planned economy or market economy, are often labelled by how much the government intervenes in its economy. However, theories based on such paradigms can hardly explain the behaviours of governments in the real world. This research argues that government is a part of the market mechanism, but not the opposite of market. A city government is in nature an enterprise that sells its products and services within its territory. Correspondingly, a city is in nature a place to trade public services, which makes the key institutional difference between a city and a village. In light of his argument, the theoretical debate on public goods is first examined. Then the behaviours of Chinese local governments are investigated and explained with a new framework, which cannot be achieved with traditional theory. Case studies in China demonstrate that the rapid growth of Chinese cities in recent years results mainly from the success of the business model of Chinese local governments. Lastly the inadequacies and mistakes of traditional urban planning theories in the Chinese context are analyzed and suggestions are made to transfer planning theory to the new paradigm, which is based mainly on the assumption that the behaviours of governments is to maximise their surplus. In the appendix a new pricing theory is formulated to extend the theoretical ground of this research. With this theory, the public goods can be supplied on a competitive market without substantial distinction from other goods.
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